Austerity and sustainability of the pension system
(… very didactic title …)
(… [8.17pm, 16/1/2024] A friend you know but would never guess who he is: Nice speech from Brambilla.
[10.18pm, 16/1/2024] Alberto Bagnai: But people don't understand, they don't understand! I'm really desperate.
[10.18pm, 16/1/2024] Alberto Bagnai: Anyway, thanks! …)
I thank Itinerari social security, its Scientific Committee and in particular its president, Prof. Alberto Brambilla for inviting me to this very interesting moment of study and discussion.
The effort made by Itinerari social security to present an objective and truthful quantitative picture of the complex world of social security, with a work that I would define as true cultural mediation between data and politics, is particularly meritorious. Faced with a multifaceted picture, and prospective analyzes that are not always organic, the budget drawn up by Itinerari Previdenziale today represents a precious evaluation tool. Here we find, in a single document, an overall vision that insists in particular on the sources and sustainability of the financing of the social security system.
Like every year, the picture that the Report gives us is characterized by lights and shadows. As an optimist I always prefer to start with the bad news. Undoubtedly, the most disturbing fact highlighted by the Report refers to the explosion in welfare spending. A fact, I would like to underline, which in itself would not represent an absolute novelty, but which is worrying for two reasons: for the rapidly accelerating dynamics, and because it is totally absent from the public debate, which is all centered on the topic of pensions.
This part could therefore be summarized by saying that if a social security emergency exists, it is not entirely correct to identify it with a pension emergency, especially when, as the Report does, a correct comparison is made with the situation in other European countries.
So here comes the good news:
- After the interlude of the pandemic, the improvement in the active/pensioned ratio resumes, which has reached 1.44 (this is highlighted in Table 6.1 on page 111). The pre-pandemic maximum (1.46) has not yet been reached, what itinerari social security highlighted as the safety threshold (1.5) has not been reached, but the prospects of this fundamental indicator of the system's stability are reassuring growth;
- the employment rate increases and with it the contribution income;
- the balance between revenues and services improves, and the system deficit, which drops by almost 7 billion compared to 30 billion last year.
On the side of the privatized banks, the one most relevant to the Commission that I have the honor of chairing, there is a substantially stable number of members, compared to the previous year, and situations of financial equilibrium, with operating surpluses in a context in which the banks have overall demonstrated that they are capable of implementing "integrated welfare" and have shown a propensity to play the role of institutional investors and to contribute to the development of the country's real economy.
However, even this relatively good news must be contextualized in light of the "great demographic transition". A theme on which the report insists a lot, and which is represented in a plastic way by figure 6.1 on p. 122
which illustrates the "big retirement" through the size of the cohorts of "baby boomers": the wave of the latter has not yet ended, and the report indicates the need for precautions to avoid the "subtle balance" on which the system holds up is compromised.
The demographic transition is in the life of each of us, of me who at sixty-one years old have no grandchildren, having been the grandson of a grandfather who was younger at the time than he is today (but also of a grandfather who died younger than me , so I'm not complaining). A fate shared, I imagine, by many of you too, and expressed in the statistics effectively summarized in the report.
As an old macroeconomist, I would like to add an element of analysis, which I would like to propose as a specific investigation to the Management Bodies Commission: in addition to the demographic winter, the macroeconomic winter must be taken into account, not only and not so much to cry over spilled milk, but to correctly evaluate the effectiveness of previous reform interventions, in order to better direct a possible "reform construction site", to find if not the compass that Professor Brambilla hopes for, at least his needle. I'll put it another way, referring to the interesting contribution of the prof. Brunetta, who articulated his hearing at the Management Bodies Commission on the topic of the perennial need for reform interventions in the Italian social security system: it makes sense to ask whether this repeated need for corrections depends only on the fact that the previous reforms were somehow wrong, or whether perhaps the need to correct the aim depended on other facts, unforeseen and unforeseeable by the reformer.
On other occasions I have recalled that according to the IMF, real GDP, freed from the effects of inflation, in our country will return to the value prior to the global financial crisis (the 2007 value) in two years, in 2026. We hope to shorten these times: to bring them forward by one year, to 2025, it would be necessary to grow at 1% in the next two years, to bring them forward by two years, to 2024, it would be necessary to grow by 2% next year.
Objectives which in the current macroeconomic context are extremely ambitious. To give a term of comparison, France and Germany returned to the GDP volume of 2007 (exceeding it) in 2011. Four years of system arrest against19.
The situation is not very different if we analyze the dynamics of nominal GDP, i.e. the value of production, which by definition also takes into account the evolution of prices, and which is the one used to calculate the ratios of the various financial quantities.
In this case the peak before the crisis was reached in 2008, but while Germany and France returned to that value already in 2010, Italy only reached it in 2015. Seven years of nominal GDP arrest compared to the two of France and Germany. We can also read in light of this disastrous anomaly the step in the relationship between pension spending and GDP which can be seen in figure 1.4 on p. 20 of the previous report :
a step that lasts throughout the nominal GDP arrest phase and stabilizes when nominal GDP weakly recovers.
It would be interesting to verify whether the scenarios of the various reformers took into account such catastrophic prospects, which represent an absolute anomaly in the history of the GDP of a united Italy (including world wars):
(… nb: for the sake of my country I didn't even think of presenting the graph in logarithmic scale, but since there are discerning palates here, I'll show it to you:
and who knows if anyone knows how to interpret it… ).
This absolutely anomalous stop in GDP has very specific origins, found in austerity policies. To give some orders of magnitude, according to the OECD in 2018 public investments were 30 billion below their trend path. Since 2020, the suspension of the rules has allowed them to move closer to their trend, but in 2022 they were still 20 billion below their historical path.
The Report, rightly, photographs what exists and does not venture into counterfactuals, which however can be useful to those who want to evaluate ex post the validity of the reform interventions.
If nominal GDP had remained at its trend:
(as did the GDPs of our main European partners) in 2022 it would have been about 20% higher:
and therefore the ratios to GDP, ceteris paribus, proportionally lower. Going to Table 6.4 on page 116:
this means that in 2022 the ratio between pension expenditure and GDP, instead of 12.97%, would have been 10.36%, and net of Welfare Intervention Management and IRPEF the same ratio, instead of 8.6% would have been 6.9%.
In short, we must seriously ask ourselves the question of how much the sustainability of public finances, in a broad sense, and in particular that of the public social security system, has been compromised precisely by those interventions which aimed to protect it, how much the adequacy of pensions future has been undermined by interventions implemented in the name of future generations, and which today are generally considered wrong.
Opinions change, but the rubble remains!
I underline this to forcefully bring to the attention of such a qualified audience what I believe is the most urgent of the various national emergencies to be resolved. The attention to demography and birth rate is certainly commendable and well directed, but greater sustainability of social security management is not only achieved by giving the country one's own or other people's children, but also, and perhaps above all, by giving it investments, i.e. growth, i.e. stability of individual career paths, i.e. a concrete possibility of realizing one's aspirations for parenthood, that is, be careful!, lower spending on welfare interventions, and greater tax and social security revenue.
I say this not to belittle but to enhance the proposals of the Report whose wise proposals would be frustrated if in a context of crisis pro-cyclical policies were implemented whose effects I have tried to help you quantify.
(… in reality I went off the cuff and so if you want the exact words spoken you can find them here:
and if your heart holds out – or another internal organ of your choice – you can also find the whole event on the Chamber's web TV .
I, I confess, was already thinking about the next appointments – at the Indian embassy where I unexpectedly met one of you, who must have seen me rather tired, and then at a business dinner, where I arrived even more tired – but I I trust enough those who habitually read and don't look like a cow etc.:
and the problem is that above all the intervention of the venerable – in his own way – colleague Tabacci, for whom I have sympathy, met with pleased nods of assent from an audience which I believe really did not understand what I said to him. Maybe it's not easily explainable, or I'm not capable of it, or the horror of having done something to ourselves in times of peace that is twice as serious as what we did to ourselves in the last war is such that it commands instinct of survival an immediate psychoanalytic removal. No one wants to see the grave that we have dug for ourselves, for nothing, in the GDP series: you show them that they have smoked 20% of the nominal GDP, and they also talk to you about Idraulik and the scalable tobacconist, and the public condescendingly he nods, perhaps because he finds himself on familiar ground, in the manure that the information operators feed him every day, those so avid in pursuing usque ad effusionem alieni sanguinis the fake news, because the manure stinks, yes, but you get used to it, and to the end his time is comfortable.
They will never understand, and therefore they will never help us get out of it.
Therefore, we will not get out of it in a non-traumatic way, but as I get older, I also see that I am starting to repeat myself, because I have always told you this, while as you mature, perhaps you begin to understand it, and in turn remove this horror, and the horrors naturaliter resulting from it …).
This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2024/01/austerita-e-sostenibilita-del-sistema.html on Tue, 16 Jan 2024 22:52:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.