The Necessity for a Restructuring of the Welfare System

At the Turin conference, authoritative academics, members of the professions, from the world of finance and insurance, policy makers, met to discuss the subject of population ageing. In particular they considered the repercussions of longevity and the increase in life expectancy on the economic sustainability of Welfare systems.
Population ageing interacts with low birth rates and the increase in life expectancy to create an ever larger and longer living pool of the elderly. From a society of parents and children we are rapidly becoming a society of grandparents and great grandparents. Demographic predictions to 2050 talk of an elderly population in the European Union which will exceed 100 million, 20% of whom will be Italian. These forecasts foresee a situation in which every person of working age will have to produce an income sufficient to support himself as well as to cover the social security and socio-health costs of at least one elderly person. Until a few years ago this co-relationship provided for two individuals of working age supporting one elderly person. This demographic reversal is destined to put a further burden on public budgets, through increases in the costs of pensions, health services and social security.
It is important to remember that pension expenditure has exceeded 15% of Gross Domestic Product, more than 3 percentage points greater than the European average. ISTAT (Central Statistics Institute) calculates that the pension deficit amounts to 900 euro a head, newborn and immigrants included. Italy still presents significant pension imbalances, continuing meantime to maintain the highest contributory rates (33%) of the OECD countries. Its pension provisions are also among the most favorable in the world with a substitution rate equal to 78% of final pay despite the various reforms that have taken place over more than a decade.
To demographic changes are added important epidemiological changes that accentuate the disabling elements linked to ageing and make the need for assistance for the non-self sufficient disabled elderly particularly pressing. It represents, in short, a point of serious fragility for the sustainability of financing regional budgets on which the demand for health service is made. Last year health expenditure exceeded 102 billion euros — about 7% of GDP. In the last 10 years it has grown at an annual average rate of 7% with a dynamic almost double that of nominal GDP and three times more than inflation. The Corte dei Conti (audit court) recently estimated that demographic components alone will cause health costs to absorb almost 9% of GDP by 2050. The OECD, taking also into consideration the effects on health consumption and the demand for social welfare services on the part of the non-self sufficient elderly, estimates that Italy will experience such a growth in health expenditure as to reach 13% of GDP.
Faced with these figures it is imperative that welfare policies compatible with demographic dynamics and the dynamics of the state of health should be developed so that we avoid unloading on future generations, as happens today, the whole burden of current incomes. It is particularly important to establish a new social pact capable of guaranteeing the rights of the young who are unrepresented and have no say in the decisions on Welfare policies, despite being the ones on whom the intergenerational debt and the greatest part in financing pensions for the most elderly falls.
Finally longevity should no longer be seen as simple ageing but as a fundamental resource for the economic and social development of the country. The aim of this convention in fact is this: to pass from a view of ageing as a threat to one of longevity as an extraordinary opportunity for development.
To achieve this various approaches are needed. We must free ourselves of old ideas. We must get out of the kind of management of the imbalances in Welfare which is concerned only with managing, more or less strictly, the actuarial problems connected with the intergenerational redistribution of income.
It is fundamental that workers should be offered more individual leeway with regard to how and when to retire completely from work. The elderly should be offered economic incentives, financial tools, socio-welfare services, legal frameworks enabling them to continue to be part of the work force for as long as possible. Retirement should be made more flexible. However appropriate incentives and legal frameworks are necessary, i.e. ones that can encourage longer working careers and discourage early exits from the labour market. Retirement flexibility could be used in various closely connected ways such as the possibility of choosing one’s retirement age, or the faculty for gradually leaving the world of work through partial retirement schemes.
Only through action aimed at drawing from longevity its full potential in terms of economic and social growth can one think of rebalancing our Welfare system, making it more efficient and above all more fair.

Enrico Salza: President of the Management Board INTESA SANPAOLO.

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