Labor Cost, Social Security and Employee Severance Funds

There are many significant links between labour cost, social security and employee severance funds. Decisions regarding each of them may affect the overall long-term development of economic and social policies in Italy through these links. There is nothing new in this, and the fact that this view is gaining currency is in keeping with the ebbs and flows of the debate on the relationship between the state and the market, which at present is strongly affected by the laissez-faire stance. In order to assess the rationale of the different arguments, however, it is necessary to avoid the irrational influence of fads and analyze the effectiveness of any general approach by looking into its nature and the specific proposed applications. In the matter at hand, the most appropriate way to reduce the government role would be the introduction of a new and radical pension reform designed to further put a curb on the state social security system and to develop a private funded pension system, which might be financed using also the flows to employee severance funds (so–called TFRs). Downsizing the state social security system and the contribution rates that finance it would lower the cost of labor and boost economic growth and employment. Before delving into it, it might be worthwhile to clarify the foundations and the building blocks on which this proposal rests, as summarized in the following points: 1. In Italy, apparently the state social security system is costly and its future is a cause for concern; this anomaly should be eradicated. 2. A reduction in the state social security system might lower contributions paid by firms, thereby decreasing the cost of labor. This, along with other measures, that would make the labor market more “flexible”, would be the most important course of action, as it would stimulate investments, raise competitiveness and improve growth and employment. 3. While preserving the current organizational system, the reduction of social security contribution rates would not translate into a simultaneous and corresponding reduction of social security benefits; these, instead, would diminish at a slower pace, over several decades. If, during the long transition period, additional burdens on the public budget cannot or will not be accepted, it would be necessary to cut pension benefits immediately, curtailing those that are being paid now. 4. Considering that the reforms of the 1990s have already reduced the degree of social security coverage provided by the state system, any additional cut to pension benefits would definitely increase the need for a private pension system, which should be encouraged by the state. 5. Advocates of this proposal hold that contributions to private pension funds would yield greater returns so that, in the transition from a public pay-as-you-go scheme to a funded private one, not only would labor costs for firms fall but workers might even take advantage of the higher returns provided by the market. 6. Furthermore, a supplementary pension system should help the development of Italian financial markets, thus making the economic system as a whole more efficient, thereby fostering its growth. 7. In order to develop a supplementary pension system, TFRs might be utilized. In fact according to some observers, TFRs should be dispensed with because they represent one of the anomalies of the Italian labor market. Within the context of this argument, the latter aspect, however, is controversial because the elimination of this important source of financing is not regarded favourably by firms.