US embassy cable - 03ROME4537

UNCLAS  ROME 004537 
 
SIPDIS 
 
 
DOL FOR ILAB/BRUMFIELD 
DEPARTMENT FOR DRL/IL AND EUR/WE 
 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: ELAB, ECON, PGOV, IT, ITALIAN POLITICS 
SUBJECT: PENSION REFORM: THINK BIG, SETTLE SMALL; GOVERNMENT 
FINALIZES MODEST REFORM PACKAGE 
 
REF: a) ROME 2474 b) Rome 1899 
 
1. (SBU) Summary:  The Berlusconi government has hammered 
out a pension reform package after two years of speculation, 
coalition wrangling and increasingly dire warnings over the 
system's unsustainability.  Prime Minister Berlusconi was 
forced to settle for a modest package that falls short of 
the ambitious overhaul sought by Finance Minister Tremonti 
and a host of economists, businessmen and Eurocrats.  Now he 
faces a tough fight to overcome organized labor's opposition 
and win public acceptance for even this modest proposal. 
Italy's potent trade union confederations are gearing up for 
an autumn of strikes and agitation to; their ire stems more 
from the government's tactical decision to freeze them out 
of the bargaining than from the meat of the package.  The 
furor over pension reform won't topple this Berlusconi 
government as it did his first regime in 1994, but it will 
ensure a bumpy ride the rest of this year.  End Summary. 
 
2. (U) In a highly unusual direct appeal, Prime Minister 
Berlusoni addressed the Italian nation September 29 to pitch 
the pension reform package approved by the Council of 
Ministers earlier that day.  His remarks, carried by the 
national public TV networks, emphasized the unsustainability 
of Italy's current public pension system and his 
government's determination to reform it.  The reforms would 
be just and wise, in that they would be introduced gradually 
and would not change requirements for those workers poised 
to retire.  The prime minister's address capped a months- 
long series of often bruising negotiations among the 
coalition members over the terms of the reform package. 
Negotiated concurrently with the annual budget package, the 
pension reform plan will be ammended to a proposal already 
passed by the Chamber of Deputies (ref a) that would 
redirect severance pay that companies currently hold in 
escrow to private pension funds and would reduce employers' 
required contributions to the public pension system for 
young workers. 
 
3. (U) The pension reform package contains a mix of 
immediate and longer-term fixes.  In the short term, the 
package will: 
 
-- waive payroll taxes for retirement-eligible workers who 
decide to stay on the job past their initial retirement 
eligibility date, increasing their take-home pay by as much 
as 35 percent; 
 
-- increase payroll tax rates for self-employed and 
independent workers, to provide some additional short-term 
inflow and pare the pension system's near-term operating 
deficit; 
 
-- impose a surcharge on a group of wealthy pensioners who, 
although entitled to a public pension, don't need one to 
maintain a decent standard of living. 
 
The heart of the reform proposal would not be implemented 
for an additional five years.  Beginning in 2008, 
prospective pensioners will face tougher eligibility 
requirements for public "seniority" (defined benefit) 
pensions.  To qualify at that point, pensioners will have 
to: 
 
--  have worked, and contributed to the pension system, 40 
years (vice the current 35); or 
 
-- be at least 65 years old (men) or 60 years old (women), 
vice the current threshold of 57. 
 
According to Tremonti, the tougher qualifying requirements 
should generate roughly 12 billion Euro in savings over the 
remaining 30 years of the defined-benefit "seniority" 
pensions, which will gradually phase out as workers shift to 
defined-contribution schemes under the terms of the 1995 
Dini reform package. 
 
4. (SBU) Although Tremonti (supported by Central Bank 
Governor Fazio, EU Commissioner Solbes and others) had 
sought more radical reforms that would have introduced 
penalties for early retirement and phased in the tougher 
eligibility requirements more quickly, the center-right 
coalition's conflicting interests gradually whittled the 
 
 
package down.  The Northern League refused to countenance 
early retirement disincentives or rapid phase-in of tougher 
eligibility requirements, reflecting one of its core 
constituencies, northern workers.  National Alliance 
resisted attempts to pare the pension benefits enjoyed by 
public sector workers, although the public employees' unions 
are furious that the incentive program will be limited to 
private sector workers. Finally, the Union of Christian 
Democrats of the Center resisted cuts to Italy's generous 
disability benefit scheme.  In the end, the modest package 
was the best Berlisconi could realize. 
 
5. (U) Meanwhile, organized labor watched -- and steamed -- 
from the cheap seats.  Accustomed to a collaborative process 
in which their views were solicited as prior coalitions 
crafted proposals and draft budgets, the major trade union 
confederations grew increasingly angry as the center-right 
government repeatedly postponed discussions while it haggled 
over the details of the package.  The unions believe that 
structural pension reform isn't really necessary, but to 
varying degrees were prepared to support some elements of a 
reform package, such as incentives to postpone retirement. 
Berlusconi and his coalition partners presented their 
finished proposal to the confederation leaders September 29 
and said they were prepared to discuss adjustments 
consistent with the package's objectives -- but it would 
have to be done in three days, in order to maintain the 
timetable for presentation to Parliament.  Not surprisingly, 
the unions rejected these conditions; when Berlusoni elected 
to pitch the package on national television, they 
immediately announced a four-hour general strike October 24 
and warned of additional labor actions and unrest if the 
reform package went forward unaltered. 
 
6. (U) Employers' associations joined Tremonti in advocating 
a more radical, effective reform package, but they appear 
inclined to accept the more modest reform in exchange for 
reduction of some payroll taxes and other financial 
incentives for companies. 
 
7. (SBU) COMMENT: The Berlusconi government's reform package 
is a further step in the right direction, but it will not 
generate the budgetary savings and alter the government's 
balance sheet enough to cut the deficit, foster economic 
growth or promote job creation in the short term.  Deferring 
the major reform elements until 2008 also defers needed 
deficit reduction, and the near-term incentives ironically 
may increase pension spending over the next five years. 
That said, it's the best package this coalition could 
produce.  The fight over pension reform exposes the most 
basic of the many differences among the coalition members 
that impede Berlusconi from pursuing the bolder economic and 
political reforms that he promised would make his government 
different from its predecessors. 
 
8. (SBU) Berlusconi's more confrontational line with 
organized labor is, at this stage, more positioning than 
principle.  The government's had some past success in 
reaching accords with the two more moderate confederations 
(CISL and UIL).  There are indications that discussions 
continue behind the public posturing, with the 
confederations seeking a more gradual introduction of the 
tougher eligiblity requirements.  A government agreement 
with the two moderate unions (CISL and UIL) would cement a 
majority of public opinion behind the reform proposal.  It 
would also eliminate another issue around which the three 
increasingly fractious trade union confederations might 
coalesce.  But the price would be further softening of an 
already modest package. End Comment. 
 
Sembler 
 
 
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	2003ROME04537 - Classification: UNCLASSIFIED