Italy and Denmark from Early Retirement to Active Ageing. Problems and Solutions for Structural Unemployment and Pension Funding
4. Solutions: Recasting the Institutional Bricolage
Denmark and Italy tackled the problem of early retirement from two different starting points. The former mainly focused on active labour market policies, while the latter favoured the field of pensions. At the same time, Denmark also repeatedly faced a lingering pressure from an unresolved pension question, just as Italy tried to modernize its labour market, even if less efficiently than its Nordic counterpart.
4.1 Sequential Path Shifts During the Nineties
The worsening unemployment, economic stagnation, inflationary pressures and public deficits have been the main drivers of problem pressure in the two countries. After the fruitless devaluation strategies pursued as an immediate reaction to the collapse of Bretton Woods, monetary stability had become an essential objective. Denmark had pegged the Krone to the German Mark since 1982 and Italy longed for an early admission in the European Economic and Monetary Union. While a boom in aggregate demand could have been considered a solution to unemployment in a Keynesian perspective, governments in both countries started to evaluate the spiral of negotiated wage increases as a zero sum game, even in the short term.
The imperfect institutional consistency of the Danish political economy allowed the lax formal protection of employment to discharge the social costs of shedding labour on the generous public unemployment protection schemes (Madsen, 2006), leaving the government no real option for tackling the issue directly. Italy experienced a similar trend, but the disproportionate protection granted to the industrial workers (insiders) also crowded out public support for the development of the tertiary sector. Reforms stalled in the Eighties, as tough political competition prevented any consensus on cost containment and restructuring. In Italy labour market policy remained passive and unemployment and pension expenditure kept rising. In Denmark, labour market policies were left largely untouched (excluding the introduction of parental and educational breaks) and the cost containment efforts pursued in the early Eighties were more than compensated for by a sequence of expansionary interventions on pension expenditure up to 1991. The only noteworthy subtractive measure was a new tax levied in1982 by the liberal-conservatives on the interest gains of funded schemes.
In the Nineties, two unexpected events allowed the Amato (1992) and the Rasmussen (1993) governments to give a decisive boost to policy change. The crisis of the old party system in Italy, following the judicial inquiries of Clean Hands obliterated any possibility of credit claiming for the incumbent parties, leaving strong directive powers to the executive. Up to 1994, the Amato and Ciampi cabinets managed to agree with the social parties on two protocols for the enactment of major macro-economic reforms, including a revision of social expenditure and of the regulatory framework of the labour market. Even if they can be considered technical for the way they have been appointed and the criteria used to select their components, the action of these governments is certainly influenced by a neo-progressive identity and by the reformist ideas elaborated within the old centre-left. Pursuing a broader project of restoring the Italian economy to health, Amato also enacted the first subtractive pension reform, (L. 421/92) which contained various measures for reducing aggregate pension expenditure and made the first moves toward the phasing out of early retirement and the introduction of a multi-pillar pension system.
The government chaired by Poul Nyrup Rasmussen was instead the first Danish majority government since 1973. Exploiting its parliamentary strength to foster innovation, it enacted a radical shift towards activation, integrating the costly flexibility and security Danish model with a third corner based on education and learning. The Law on Active Labour-Market Policy (1993) revised the link between unemployment insurance and retraining, distinguishing a first passive period of financial support and a second period of activation. Initially, the generosity of unemployment benefits was improved for retirement workers older than 50 who became eligible for unlimited transitional unemployment benefits as an intermediate pattern to the efterløn. At the same time, the government enacted two retrenchment measures on pension policy that the centre-right opposition viewed very critically: national pension benefits became increasingly means-tested and pension income was made taxable. In the long run, the new measure would have reduced both pension expenditure and occupational inequality among categories with different access to occupational pensions. The labour market reform was also supported by a tax reform (fiercely opposed by the centre-right) that sequenced expansion and restriction and granted more employment opportunities to the newly “activated” labour force (Green-Pedersen, 2001, 2006).
In 1994, the reform process seemed to slow down: the new Danish elections reconfirmed the social-democrats, but only as a minority coalition. In Italy, a new centre-right government, led by Silvio Berlusconi and composed of parties uncompromised by the corruption scandals failed in its ambitious and market-friendly reform attempt (Ferrera and Jessoula, 2006). Notably, one of the components of the coalition, the Lega Nord assumed a decisive role in the cabinet crisis, opposing the proposal of pension reform and consolidating its success among the blue collar insiders of the North (Natali and Rhodes 2005). Between 1995 and 1999, however the sequence of reforms saw a new decisive phase and consolidated its main lines of continuity. In Italy, the technical Dini government, supported in parliament by the centre-left and the Lega Nord was able to exploit both an NiC argument and its technocratic identity to enact a path breaking pension reform (L. 335/95). The new package set a gradual but radical recasting of the public pillar, introducing, at the top of the existing system, a new harmonized regime based on a Notional Defined Contribution (NDC) for a vast majority of the workforce, including the previously unprotected atypical workers. In the new contributory regime, seniority pension was not included; rather, a flexible retirement age between 57 and 65 was intended as an incentive-based solution to the problem of early retirement: the contributory formula was meant to neutralize any discrepancy, automatically adjusting the actuarial relation between accrued contributions and the expected value of future benefits (D’Ercole and Terribile 1998). With reference to the existing seniority pensions, the Dini government provided a very slow retrenchment of the whole institute: a first route required 36 years (rising to 40 by 2008) for seniority retirement, while a second route still required only 35 years, but imposed a minimum age requirement, rising to 57 years (58 for self-employed) by 2008, with different progressions for different occupational categories. Eventually, the Dini government indirectly addressed the problem of early retirement with an exceptional round of controls against fraud by the beneficiaries of invalidity benefits.
In the following years, the centre-left governments enacted some parametric refinement to the main provisions of the Dini reform, especially in terms of giving further incentives to convert the Tfr (statutory severance payment) into occupational pension savings. Most notably it also pushed through, in the corporate (with the social pacts of 1996 and 1998) as well as Parliamentary arena, important reforms of the labour market, completely revising the passive and reactive logic of the old rules. The Treu package of 1997 (L. 196/1997) introduced new flexible employment opportunities (such as ad interim jobs) and a brand new legal framework, promoting activation and training within a more decentralized structure, especially for the young and for first-time jobseekers. Notably, the new pension coverage granted to atypical employees by the Dini reform contributed to the overall consistency and credibility of the neo-progressive logic behind the reform. In a clear example of recalibration and restructuring, flexible employment became more attractive for both the unemployed, who obtained old-age protection and the pension systems, gaining fresh new contributions (Natali, 2008). The organizational involvement of the unions in the management of similar activities at the local and firm level has contributed to institutionalizing the new logic of continual training. Even if the main targets of the reform were women, youngsters and the unemployed, the logic of the Treu Law was fully extended to the elderly by 2000 (Carrera and Mirabile, 2003). In 1999, a revision of the unemployment scheme made eligibility conditional on the participation in orientation and re-training activities.
In Denmark, the new social-democratic minority governments kept on reinforcing the activation element of the flexicurity approach and adjusting the national pension to the consolidation of the occupational pillar. The labour market reforms of 1996 and 1998 were inspired by a bipartisan consensus on activation: breaks started to be phased out (educational leave, abandoned in 2001) or scaled down (parental leave) and the coverage of unemployment benefit was reduced from 9 years, (4 of which involving activation), to 5 in 1998, with only one year of unconditional financial support. In 1995, the unlimited unemployment benefits pathway to efterløn was newly restricted to workers over 55 and was finally reformed in 1998, but only after a tripartite agreement. Retirement was made conditional on 25 years of contributions, benefits were reduced if early retirement was exercised before 62 and a cash premium was granted to eligible workers choosing to retire at the regular retirement age. This last, in turn, was lowered from 67 to 65, specifically to reduce expenditures, since efterløn benefits were much higher than regular pension (Goul Andersen, 2002).
The social democrats also granted an increased coverage to workers receiving disability, unemployment or early retirement benefits through higher or subsidized contributions to the ATP, to compensate for the detrimental effect on the contributory record of their occupational schemes. In 1997, an additional first pillar mandatory saving (SP) equal to 1% of personal work related income was added to the ATP, initially to slow down aggregate consumption. Since its introduction, disagreements between government and opposition determined frequent changes in its contributory or retributive nature, until its suspension in the period 2003-2008. In 1998, the social democrats managed to pass another fiscal reform to keep the economy under control and support the functionality of the new labour market reforms. This time, the opposition of the liberal-conservatives had to be circumvented by recourse to an ad hoc alliance with the left wing opposition, who appreciated some aspects of the package (Green-Pedersen, 2001). Between 2000 and 2001, the social democrats enacted one last consensual reform to simplify the disability scheme and to grant disabled workers a public subsidy to their ATP contributions. In exchange, a test to assess the inability to perform a state subsidized flexi-job was introduced as an additional requirement for the disability pension.
The dense reformist experience of the Nineties reveals how, in both countries, the ability of the centre-left to deal with the unions, to elaborate multi-dimensional proposals and to exploit interconnections between different policy fields gave stability to the new reform process. Moreover, the reformers managed to exploit contextual opportunities (the political crisis in Italy and the majority government in Denmark) to force old policy deadlocks and open new paths to departure.
Tags: Active ageing Denmark Italy, early retirement, Political Competition