MILAN, Italy - The Italian government is expected to propose reforms to encourage an advance-funded private pension system and cutbacks in the Italian state pension system in its budget due out next week.
Prime Minister Silvio Berlusconi's budget will provide a key test of the shaky right-wing coalition government.
Mr. Berlusconi is expected to propose 8 trillion lira to 10 trillion lira ($51.2 billion to $64 billion) in state pension cuts and new revenue. That would comprise up to one-fifth of the savings needed to bring the government's budget deficit down to 139 trillion lira in 1995 from 154 trillion lira this year.
The expected pension reform proposals would be designed to spur a private system to eventually pick up the slack from the state's pay-as-you-go system.
No decisions on the mix of cuts and new revenue will be made, however, until a special commission charged with proposing radical pension reform issues its report this week. That commission is expected to propose a revamping of the state pension system and creating incentives to building a private retirement system.
The commission is expected to propose removing tax burdens on the existing defined contribution system. While the Berlusconi government last month proposed removing a 15% tax on defined contribution pension contributions that was instituted in 1993 and effectively halted new plan creation, employer and union officials are urging other taxes be abolished and new incentives be created.
Now, there is only about $55 billion to $60 billion in individual- and employer-sponsored plans in Italy. But the potential for asset growth is enormous if plans are unfettered, said Giovanni Palladino, director of finance for Confindustria, a Rome-based employers' organization.
Pension reform could bring $10 billion a year in new cash flows into private plans, he estimated. "When workers realize that Mama State cannot be as generous as in the past, Mama State will be a very cold stepmother," Mr. Palladino said.
Mr. Palladino said private defined contribution funds could become a new source of capital for capital markets, reducing Italian industry's heavy reliance on bank loans. Italian companies' ratio of debt to equity exceeds 1, compared with 0.6 in Europe and 0.5 in the United States. He hopes rules will not be imposed that restrict pension funds' investments.
But state pension cutbacks face considerable opposition from left-wing parties and unions, and division within Mr. Berlusconi's own coalition government. His ability to push through major structural reforms in Italy's expensive pension system is viewed as critical to overhauling the nation's debt-ridden economy.
"It's more than the number itself, it's the signal," said Carmen Nuzzo, an economist with Salomon Brothers International Ltd., London. A significant change "would prove the government is committed to do structural reforms," she added.
While Mr. Berlusconi's ascendancy to the premiership was greeted warmly by financial markets, his star has fallen considerably as he has proven himself less adept at handling the levers of government. The government's ability to get a budget-deficit package through the Italian Parliament "really depends on whether Berlusconi will stop stepping on banana skins," said Richard Lewis, investment manager, WorldInvest Ltd., London.
Nowhere does Mr. Berlusconi have to avoid a circus act more than in dealing with pensions. Italy's state pension system is considered the most luxurious in Europe. Retirement benefits go up to 80% of pre-retirement earnings. The annual cost of funding these benefits comprises 15% of Italy's gross domestic product, 50% more than the comparable cost in Germany.
Italy's pension debts are staggering, accounting for nearly 40% of the overall state deficit in 1993, according to Salomon Brothers. The state's projected total debt of 2.145 trillion lira is expected to peak at 124.2% of GDP in 1995 - more than twice the target level of 60% decreed by the European Union.
That's why reining in pension costs is critical to Mr. Berlusconi's efforts to control the budget deficit. The situation has been worsened by a court decision this June that forced the government to reinstate up to 30 trillion lira in pension benefits that had been cut in 1983.
The government of Prime Minister Giuliano Amato had trimmed pension costs in 1992 - by gradually raising the retirement age to 65 from 60 for men and to 60 from 55 for women by 2002, and by reducing early retirement benefits.
But those steps have proved to be inadequate. Now, the government is considering a host of options to include in its forthcoming budget proposal, which must be presented to Parliament by Sept. 30. It can:
Accelerate the retirement-age schedule;
Lengthen the period of service for full benefits to 40 years from 35 (and double the period for civil servants, who now can get full benefits after 20 years of service);
Tighten controls on disability benefits, an area fraught with stories of abuse;
Change the formula for benefit accruals from 2% of pay per year of service to perhaps 1.5%; and
Impose a temporary freeze on inflation adjustments for benefits.
Only the last two options produce any significant savings in the short term, said Salomon's Ms. Nuzzo, although all would provide important savings longer term.
Italian unions already have balked at substantial cuts. The good news is that union officials last week abandoned threats of a general strike after meeting with Mr. Berlusconi.
Unions would like most of the savings to come from employers making up missed payments to the state pension system, encouraged by an amnesty on penalties, sources said.
Some investors question Mr. Berlusconi's resolve to get significant budget and pension reforms through Parliament.
"This government doesn't seem strong enough to bring the government deficit under control," said Nicolo Braendli, director of Italian equities at Milan-based broker Akros SIM SpA.
"Every second day we get different indications from this government," Mr. Braendli added.
The Italian stock market is "extremely skeptical as to what the government can achieve," according to Franz Weis, investment manager, Baillie Gifford & Co., Edinburgh.