ITALY: Europe's biggest age problem Matthew Edwards Watson Wyatt

ITALY: Europe's biggestage problem

Matthew EdwardsWatson Wyatt

Italy: Europe's biggest age problem

Introduction Demographics Economic context Pensions reform Lessons for other markets?

Demographics

Summary Longevity Reproduction Immigration Early retirement Conclusion

Demographics

Italian population 2000

0246

Percent of population by sex & age

Males0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

90-94

Females

Demographics

Italian population 2030

0246

Percent of population by sex & age

Males0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

90-94

Females

Demographics

Italian population projection 2000-2050

0%

50%

100%

65+

20-64

0-19

Demographics

Old age dependency ratio number of pensioners per working age member of

the population

Italy now: 29-30% 3 workers per pensioner

Italy in 2050: 67-69% 1.5 workers per pensioner

Demographics

Longevity has increased continues to improve similar to other OECD countries

Demographics


TurkeyIceland

IrelandNorway

DenmarkFinland

FranceLux.UK

BelgiumNether.PolandPortugalSwedenSwitz.

AustriaGermanyHungary

GreeceCzechItalySpain

0.0 1.0 2.0 3.0

Demographics

Reproduction the lowest in Europe! 1.2 children / woman been the lowest for a long time will it ever improve?

Reasons?

Demographics

Reasons? marrying later children later in marriage fewer children (more working women)

increased materialism? effect of increased taxation?

Demographics


Demographics


Demographics

Early retirement Italy has one of the highest propensities for early

retirement Looking at the proportion of males aged 55-59

who are working ...

Proportion of males aged 55-59 who are working

Canada

GermanyFinlandItaly

Japan

Nether.Sweden

UK

USA

0% 20% 40% 60% 80% 100%

Demographics

Proportion of early retirements has been increasing steadily for 20 years 1983: 71% of males 55-59 worked 1998: 51% of males 55-59 worked

Current economic projections do they allow for such rates? do they allow for worsening?

Demographics


Demographics

Dependency ratio projections

0

10

20

30

40

50

60

70

80

1990 2010 2030 2050

Dep

ende

ncy

rati

o %

Italy

UK

France

Germany

OECD



Economic context

Italy's national debt as % of GDP approximately twice that of all other European

countries mid-1990's: 120% cf 60% other countries

Economic context

0

20

40

60

80

100

120

140

Deb

t as

% o

f GD

P 1

999

Economic context

Italy's national debt how did it get so big? what's it like servicing a national debt of 120%

when interest rates are ~ 15%? what's it like facing a demographic crisis from such

a starting position?

Economic context

Pension costs

0

2

4

6

8

10

12

14

16

18

2000 2010 2020 2030

Stat

e pe

nsio

n co

sts

% G

DP

France

Germany

Italy

Netherlands

Spain

Sweden

UK



Pensions reform

State pensions system (until recently!) pensions from age 60 M, 55 F benefit = accrual x average of last 10 yrs'

remuneration earnings revalued by cost of living + 1% accrual rate = 2% maximum of 80% plus benefits for spouses and orphans

Pensions reform

Interesting formula high national debt + demographic crisis + highly generous pension system = un grandissimo problema

Conclusion: reduce cost of pensions

Pensions reform

Modifications to pension system notional defined contribution basis increase in retirement age increase in contributions (ie tax) enabling new private pension vehicles tax incentivisation for private pensions

Pensions reform

Notional defined contribution basis notional contribution 33% salary roll-up at RPI + allowance for GDP growth apply annuity factor at retirement

Pensions reform

New defined contribution basis in action … years contributing - 40 GDP growth - assume ~ salary growth annuity rate at age 65 = 6.136

Result: 33% contribution rate applied to each year's

earnings, adjusted for GDP growth, x annuity factor 33% x 40 x 0.06136 = 81% of last yr's earnings

Pensions reform

New system still very generous Market research showed an average of only 8% of

respondents had any intention of going for private pension provision

Pensions reform

Enabling of new private pension vehicles industry funds (fondi chiusi, closed funds)

for large companies (FIAT) or national trade associations eg rubber & plastic workers

open funds (fondi aperti) for anyone not able to join fondo chiuso

private pension life insurance policies (PIPs)

Pensions reform

Problems with private pension vehicles industry funds (fondi chiusi, closed funds)

lengthy authorisation procedure no reason to popularise

open funds (fondi aperti) lengthy authorisation procedure discrimination against - closed funds take priority

private pension life insurance policies (PIPs) from 2001

Pensions reform

Problems with private pension vehicles tax bottleneck - premiums against tax only up to 2

x amount of TFR contributions earmarked for pension fund - but political impasse on TFR

small tax incentive: 11% roll-up instead of 12.5% premiums tax-free but equivalent tax incurred at vesting

constraints on getting money back out

Pensions reform

Problems with private pensions market

Open funds as at 30 Sep 2001: total of 72 Only 6 with more than 10,000 members median size: around 1,000 members average fund size: £1,600 / member

Pensions reform

Problems with private pensions market

Closed funds

PIP life insurance pensions policies




Lessons for other markets? public awareness presentation of cuts to State pension extent of cuts size of tax advantage for private pensions ease of authorisation for pension funds healthcare?


"Le donne italiane devono fare più bambini"

Italian finance minister, 2001

ITALY: Europe's biggestage problem

Matthew EdwardsWatson Wyatt

Documents

ITALY: Europe's biggest age problem Matthew Edwards Watson Wyatt