El pasado 10 de marzo de 2014 celebramos en la sede de la Fundación Ramón Areces una nueva conferencia del ciclo de Educación Financiera que organizamos en colaboración con el IE-Business School. Elsa Fornero, ex ministra de Empleo, Políticas Sociales e Igualdad de Oportunidades del Gobierno italiano, y profesora de la Universidad de Turín habló sobre 'Reforma de las pensiones y educación financiera'.

1. Financial and economic education for
better and more successful reforms
Elsa Fornero
(University of Torino and CeRP-Collegio Carlo Alberto)
Madrid, Ramón Areces Foundation, 10th March 2014

2. The never ending plea for
(economic) reforms
• As a result of the financial/economic crisis and
the harsher global competition, many countries
have (had) to undergo structural and far-
reaching reforms
• Main areas: welfare system, labor market, public
employment, liberalization of protected sectors
and of the so-called “liberal” professions
• With economic reforms, citizens face, in general,
immediate costs versus uncertain future benefits
 their understanding thus becomes a
(necessary, but not sufficient) condition for the
reform to succeedMarch 2014 Elsa Fornero, University of Torino and CeRP 2

3. Definition of “reform”
i. «To improve (an existing institution,
law, practice, etc.) by alteration or
correction of abuses»
ii. «To give up or cause to give up
a reprehensible habit or immoral way
of life»
(Wordreference.com)
March 2014 Elsa Fornero, University of Torino and CeRP 3

4. The respective role of political
parties and of expert/technocrats
in realizing reforms
• Economic reforms are usually a mix of political and
technical elements, the former in the forefront of
communication, the latter more behind the scene
• When “selling” the reform to the public, political
parties typically tend to look at reforms from an
ideological perspective and to conceal their more
“technical” aspects
• This schemes weakens or break up in emergency
situations, where the technical aspects of reforms
become dominant; it is then the task of technocrats
(or of experts from international institutions granting
aids) to prepare the reforms
• Technocrats however do not rely on ideological
message to communicate the reform and if the
public does not understand its basic principles, it
risks being repealed or having little effects
 Financial literacy thus matters not only for individual
wellbeing, but also for societyMarch 2014 Elsa Fornero, University of Torino and CeRP 4

5. Financial and economic
literacy in individual and
collective choices
 Lack of financial literacy has typically been
associated to the risk of poor saving choices
during the life cycle. This risk is indeed
increasing, together with individual responsibility,
as a result of both the retrenchment of the
welfare state and the greater sophistication of
today’s financial markets
 Financial-economic literacy may be crucial for
the success of economic reforms (particularly
emergency-driven reforms). Lack of understanding
may cause the reform to be reversed/greatly
revised or its incentives not to work
 A conclusion strongly derived from my own
experience as an economist (unexpectedly)
turned the Italian Minister of Labor, SocialMarch 2014 Elsa Fornero, University of Torino and CeRP 5

6. Understanding pension reforms/1
why are reforms needed
• Financial unsustainability: ever growing “implicit” debt
• Economic unsustainability (poor scheme design):
inefficient allocation of risks: inability to cope with the effects of
demographic and economic changes
inefficient incentive structure : incentives to early retirement
 bad redistribution (segmentation of schemes, privileges)
 lack of transparency
 “excessive” political interference
• Social unsustainability (inadequacy of old age provisions):
inadequate insurance coverage
type of pension benefits (indexation of benefits to wages?)
inadequate provisions for Long Term Care
inadequacies in the amount and composition of wealth in old age
March 2014 Elsa Fornero, University of Torino and CeRP 6

7. Understanding the PAYG
system/2
A matter of financial-economic literacy
• PAYGs return depends on demographic and
economic trends. The generosity of today’s
system cannot be independent of the
(structurally worsened) situation, with a
rapidly aging population and a decline in
economic growth
• Understanding two elements of
unsustainability of a public pension scheme:
i) the political tendency to favor the
present generations at the expense to the
young and future ones
ii) the inability of badly designed systems
to effectively respond to the economic
and demographic challenges
March 2014 Elsa Fornero, University of Torino and CeRP 7

8. Understanding the PAYG
system/2
• “Acquired rights” or unsustainable
privileges? A call for equity and
intergenerational re-balancing behind the
reform
• When people understand that their
pension “entitlements” were built on
debt to be honored by future
generations they can be less hostile
to pensions restructuring
• An expensive pension system is
financed mainly from contribution on
workers; trade-off between generousMarch 2014 Elsa Fornero, University of Torino and CeRP 8

9. Understanding Defined
Contribution
• The knowledge of compound interest is crucial
to understand that pension wealth is
accumulated by paying contributions and that
each euro paid into their “retirement account”,
particularly at younger ages, will be
capitalized.
• The concept of risk diversification, properly
understood even if only at its core, could
help people in their decision to participate in
a pension fund, as a way to combine both
an unfunded and a funded pension, as they
are characterized by different risk/returns
combinations. (Retrenchment in the public
system may lead to more diversified pension
wealth)
March 2014 Elsa Fornero, University of Torino and CeRP 9

10. Italy - November 2011:
the looming financial crisis and the sense of urgency
March 2014 Elsa Fornero, University of Torino and CeRP 10

11. The 2011 “cold shower”
reform
• Application, as of Jan 2012 and for future seniorities, of the
DC formula to all workers, with periodic (every 2 years) updates
of annuity rate coefficients
• Increases in the statutory retirement ages (66+longevity, in 2018) and
phasedown of seniority pensions
• Alignment, as of 2018, of ages and seniority requirements for
women in the private sector to those of men/women in the
public sector
• Indexation of eligibility requirements to life expectancy (three
preceding years var)
• Increases in payroll tax rates for farmers and the self-employed
• Temporary freeze of indexation for average-high pensions (>1400
€)
• Solidarity tax on higher pensions (sadly cancelled, later, by the
Constitutional Court)
• Free “totalization” of contributions for NDC benefits
• Elimination of “exit windows”, by which workers had to wait 12/18March 2014 Elsa Fornero, University of Torino and CeRP 11

12. Transitional and communication
problems
• Due to the emergency situation (prospect of a financial crisis), the
social dialogue had to be foregone
• Insufficiency of data caused insufficiency of safeguarding clauses
and the need for subsequent amendments
• The reform aims at dismantling the rooted notions that:
 workers over 54-55 are lost to the labor market and just destined
to retirement
 elderly workers take away jobs from younger ones
• Difficulties in:
 having the reform understood
 overcoming the notion of “acquired rights”
 explaining the implied generational rebalancing
March 2014 Elsa Fornero, University of Torino and CeRP 12

13. Labor and pensions:
two sides of the same coin
As Franco Modigliani’s life cycle
hypothesis has taught us long ago,
work and retirement are two
matching segments of our life.
No pension system can deliver
adequate benefits if the labor
market – which generates the
resources on which current pensions
are paid - does not perform
adequatelyMarch 2014 Elsa Fornero, University of Torino and CeRP 13

14. The “lump of labor fallacy”
The “lump of labor fallacy” – the idea that
jobs are in a fixed number so that early
retirement by the elderly makes room for
jobs for the young – has long dominated, in
some countries, the public debate in the
field of pension reforms and brought about
policies directed at reducing the retirement
age.
This belief creates hostility towards the
reform and obscures its generational
rebalancing by making people believe that if
retirement age is postponed there will be
fewer opportunities for the young (and/or for
women: as the same erroneous reasoning
has also long been applied to women andMarch 2014 Elsa Fornero, University of Torino and CeRP 14

15. What is a labor market
reform?
• Changing market regulation:
- how: incentives and disincentives vs legal
requirements and prohibitions
- how much?
• Initial circumstances matter: structurally weak
economy experiencing a deep depression
• Social/political constraints should be taken into
account
• Trying to find a balance: a) between short-run
and medium-run effects b) between conflicting
goals of social partners and political parties
March 2014 Elsa Fornero, University of Torino and CeRP 15

16. Understanding labor market
reforms
• High expectation for the reform to
immediately create new jobs: is this
justified?
• Short term vs medium term: swift
deregulation of the labor market vs
building better work relationships
(apprenticeship)
• How to increase workers employability
• How to design an effective (and not
discouraging job search) social safety
net
• How to enhance productivity?
March 2014 Elsa Fornero, University of Torino and CeRP 16

17. Spring 2012: tackling Italy’s
long standing labor problems
• Market dualism: protected (mainly men, over
forty, in industries and government jobs) vs
marginalized groups (the young, women and
older workers), causing rigidities on one side
and precariousness, on the other
• Low participation rates, particularly among women
and older workers
• Unwarranted separation (also ideologically
motivated) between school and work; insufficient
vocational training and lack of adult education
• Predominance of passive policies and poor or
absent ALMP, regionally provided, with few
exceptions
• Very high fiscal wedgeMarch 2014 Elsa Fornero, University of Torino and CeRP 17

18. A complex reform resting on
five pillars
1. Flexibility in labor market entry
2. Flexibility in labor market exit
3. Social protection schemes
4. Employment services and activation
policies
5. Follow up, monitoring and evaluation
The reform has been the result of extensive
consultation with the social partners and wide
ranging debate leading to broad agreement in
Parliament. It was then, however, rapidly
disowned irrespective of a positive international
evaluation as an important step in the right
directionMarch 2014 Elsa Fornero, University of Torino and CeRP 18

19. Opposition and latent
contradictions
The trade unions opposed the reform for doing away
with “guarantees”; employers for trying to limit
abuses of flexible contracts that had fuelled an
abnormal proliferation of short term, vulnerable and
badly paid jobs
A satisfactory equilibrium was finally reached that, if
properly applied, will rebalance opportunities in
favor of the young and improve the quality of
labor, solving medium term problems
Sadly, the reform was introduced right in the middle
of a deep recession
The absence of immediate results has been at the
root of widespread criticism (and also of vicious
personal attacks)
However, the ultimate success of the reform rests
upon the possibility of change in individual and
collective behavior
March 2014 Elsa Fornero, University of Torino and CeRP 19

20. Political double standards
Political parties were well aware both that the
pension and labor market reforms were long
due and indispensable, and that they would
entail a period sacrifices
Parliament voted both reforms, but the same
political forces that approved them, instead of
helping to explain their content to people,
immediately started to disown them and to
criticize the technocratic government for its
“austerity“ measures
This is an example of lack of political courage.
No political force in Italy was brave enough to
say clearly that with this type of reforms
March 2014 Elsa Fornero, University of Torino and CeRP 20

21. Lessons for an economist
accidentally turned minister
 Has the “medicine” been too harsh? Reforms
were the result of an emergency situation
coupled with structural weaknesses, not of
extravagant ideas
 The stop to the “Infraction procedure for
excessive deficit” by the EU Commission (May
29th, 2013) shows that sacrifices are starting to
pay; this is a good message to deliver to
people
 In a democracy, however, technocratic
governments may enjoy a parliamentary majority
but are politically friendless and ministers
introducing complex reforms stand alone
 In certain circumstances, this may however beMarch 2014 Elsa Fornero, University of Torino and CeRP 21

22. Lessons that citizens should
learn
Concepts of tradeoffs and their time
dynamics, pervasive in our life, should
be part of our literacy: there is a
cost to be paid for any benefit and
the two are not necessarily
synchronized
Choices today have an impact in the
future. This is also reflected in public
budgets, so some basic knowledge of
public finance (concepts of deficit and
debt) should also be part of our
financial literacy to avoid populistMarch 2014 Elsa Fornero, University of Torino and CeRP 22

23. Financial and economic education for
better and more successful reforms
Without the support of the public opinion and without
transparent information by the media, reforms can easily
be reversed or deprived from their intended effects or
simply ignored
Financial and economic literacy can crucially strengthen
that support
It is a structural reform, so do not be discouraged by
lack of immediate results
Start with children and targeted groups more at risks
(women)
Examples:
 The tax on housing wealth (IMU), introduced with the
“Save Italy” decree (Nov 2011) by the technocratic
government, has been suppressed to comply with a
(populist) electoral promise, and later reintroduced with a
different name (TASI) in 2014
 Pension reforms in the past have also suffered from step
backs (for example, it happened in 2008 when the
retirement age was lowered)
March 2014 Elsa Fornero, University of Torino and CeRP 23