Italy's Pension Paradise Faces Fund Shortfall

`ONE day, the Labor Minister will arrive and say: `We're not in a position to pay the pensions.' And this won't happen in a distant day. It will happen very soon,'' says Giovanni Sgritta, a sociology professor at the University of Rome.

Mr. Sgritta is not referring to United States Social Security but to the Italian government's pension system - one hot potato that Italy's old political class has tossed to Prime Minister Silvio Berlusconi.

Like the American system, Italy's is a pay-as-you-go affair, meaning that the tax money paid into the system by current workers is not invested but is used to pay present pensions. But pensions here constitute a whopping 15 percent of the gross national product.

And because workers' payments are not sufficient to meet all pensions, a deficit of 20 trillion lira ($12.7 billion) is expected this year. This deficit comes at a time when Italy is already burdened by an enormous public debt and governed by a right-wing coalition of parties that seems too busy squabbling with each other to enact concrete solutions.

``Our public debt is 2 1/2 times the foreign debt of all of Latin America,'' exclaimed Foreign Minister Antonio Martino, a University of Chicago-trained economist, last week, in remarks that shook the financial markets. ``We have a country that is on the edge of [financial] bankruptcy.''

Other government ministers, however, denied Mr. Martino's latter warning.

Nonetheless, alarm over the pension situation has already led 459,000 public and private workers to apply for early retirement in the hopes of avoiding possible future cuts in benefits.

The public debt and the pension problems are the result of decades-long rule by an Old Boys' network that was ready to promise just about anything for guaranteed votes. In the last two years, judicial probes conducted by investigating magistrates in Milan and other parts of the country have exposed widespread political corruption. These revelations have discredited an entire political class. The parties most heavily implicated in the scandal are the Christian Democrats - who led the country in coalition governments for more than 40 years - and the Socialists.

The doling out of favors by politicians to political friends became endemic.

``The Italian pension system, like the health-care system, the public workers, and other forms of the welfare state developed in the last 25 years in accordance with two political pressures that were apparently in conflict but substantially convergent: the Christian Democratic interest in creating and maintaining an assisted or parasitic political clientele and the interest of the left in gaining and maintaining the consensus of those who received favors from the welfare state,'' writes commentator Giorgio Bocca in La Repubblica newspaper.

Invalid pensions show how legitimate state activities were corrupted to strictly political ends because of a lack of adequate controls.

According to Treasury Minister Lamberto Dini, one-third of the 7 million people who receive disability pensions are not disabled. He has pressed the government to ferret out frauds.

One Sicilian town, Militello Rosmarino, is called ``invalid city'' because 1 in 2 citizens receives a disability pension. (One-quarter claim total disability).

Such irregularities are only part of the problem. Still more important is finding a way to pay legitimate pensions. Italy has the world's lowest birth rate, which means fewer people will pay into the system, leaving less money to pay existing pensions.

The problem is compounded by the fact that Italy is the only nation where one can retire at any age. As long as the person has paid into the system a minimum of contributions (for the private sector, 35 years of payments; the public sector, until recently, 20 years), he or she is eligible for a ``seniority pension.''

Even millionaires, who may have worked only seven or eight years, manage to obtain state pensions, Sgritta says. ``This is a scandal. This is robbing from generations to come.''

Although ministers in Prime Minister Berlusconi's government have, for several weeks now, been putting forward various proposals to address the pension problem (including prohibiting workers from retiring before the age of 63), nothing concrete has been done. Berlusconi himself has assured the Italian people that the government will make no changes to current pensions. He met with union leaders on Tuesday to discuss pensions and the rest of his economic program, and he is scheduled to meet with them again this Monday.

Meanwhile, Berlusconi is in a delicate position because his electors were mostly well-off people who want to stay that way in a time of disconcerting change. Sgritta says to reform the pension system, Berlusconi would have to go back on promises. But drastic reform is needed, Sgritta adds. ``We have to recognize that everyone is losing in this situation.''