Transcript ITALY: Europe`s biggest age problem Matthew Edwards Watson Wyatt

ITALY:
Europe's biggest
age problem
Matthew Edwards
Watson 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
Percent of population by sex & age
90-94
75-79
60-64
45-49
30-34
15-19
0-4
6
4
2
Males
0
0
2
4
Females
6
Demographics
 Italian population 2030
Percent of population by sex & age
90-94
75-79
60-64
45-49
30-34
15-19
0-4
6
4
2
Males
0
0
2
4
Females
6
Demographics
 Italian population projection 2000-2050
100%
50%
20
00
20
10
20
20
20
30
20
40
20
50
0%
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
 Summary
 Longevity
 Reproduction
 Immigration
 Early retirement
 Conclusion
Spain
Italy
Czech
Greece
Hungary
Germany
Austria
Switz.
Sweden
Portugal
Poland
Nether.
Belgium
UK
Lux.
France
Finland
Denmark
Norway
Ireland
Iceland
Turkey
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
 Summary
 Longevity
 Reproduction
 Immigration
 Early retirement
 Conclusion
Demographics
 Summary
 Longevity
 Reproduction
 Immigration
 Early retirement
 Conclusion
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
USA
UK
Sweden
Nether.
Japan
Italy
Finland
Germany
Canada
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
 Summary
 Longevity
 Reproduction
 Immigration
 Early retirement
 Conclusion
Demographics
 Dependency ratio projections
Dependency ratio %
80
70
60
Italy
50
UK
40
France
30
Germany
20
OECD
10
0
1990
2010
2030
2050
Italy: Europe's biggest age problem
 Introduction
 Demographics
 Economic context
 Pensions reform
 Lessons for other markets?
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
Ne
er
e
lan
It a
ds
ly
UK
Au
st r
ia
Po
rt u
ga
l
Fi
nl
an
d
Sw
ed
en
th
nc
in
Ei
re
Fr
a
Sp
a
Be
lgi
um
De
nm
ar
k
Ge
rm
an
y
Debt as % of GDP 1999
Economic context
140
120
100
80
60
40
20
0
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
State pension costs % GDP
 Pension costs
18
16
14
12
10
8
6
4
2
0
France
Germany
Italy
Netherlands
Spain
Sweden
UK
2000
2010
2020
2030
Italy: Europe's biggest age problem
 Introduction
 Demographics
 Economic context
 Pensions reform
 Lessons for other markets?
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
Italy: Europe's biggest age problem
 Introduction
 Demographics
 Economic context
 Pensions reform
 Lessons for other markets?
Italy: Europe's biggest age problem
 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?
Italy: Europe's biggest age problem
 "Le donne italiane devono fare più bambini"
Italian finance minister, 2001
ITALY:
Europe's biggest
age problem
Matthew Edwards
Watson Wyatt