Good reasons to oppose an INPS capitalisation fund

There is talk of a capitalisation fund for newborns, which is expected to receive contributions from parents and the state (if the funds can be found). The advantage is obvious: to help young people build up a small capitalisation-based nest egg, ready to be used once they enter the labour market. In this way, our children too would have a little nest egg which, after years of saving, could make a significant difference to their future retirement and personal finances (for their studies or to buy a home). This is the idea behind ‘Trump accounts’, recently launched in the US – $1,000 a year for four years, paid by the Treasury, plus any additional sums contributed by parents and relatives, with tax exemption on the returns. A similar measure is under consideration by the German government. The reason is clear: given the unfavourable demographic trends, public pay-as-you-go pension schemes are at risk and can no longer be sustained. So far, everyone agrees, but here come the lions...

Who should manage this fund and how should it operate? How should the resources be invested? These are fundamental questions that are crucial to understanding whether the proposal is sound or not, but above all the true aims of the scheme. Is this fund intended to reduce the generational conflict between the working-age population and the elderly? Is it intended to strengthen the pensions of younger generations, or to find a cunning and opaque way of plumping up the public finances? We must start from a key premise: the generations born between 1946 and 1964 must find a way to contribute voluntarily, without wealth taxes, to the resources that can be accumulated by subsequent generations; generations whose wealth amounts to roughly one-third of that of previous generations. It is estimated that there will be a vertical transfer of resources amounting to around 2,500 billion over the next 20 years in Italy. There is no doubt, therefore, that a mechanism is needed to reduce intergenerational imbalances. Several years ago, together with some colleagues, we proposed a public solidarity mechanism, linked to the first pillar, which would operate not through contributions but through tax revenue. Let us be clear: if additional resources are needed for the state budget, this should be stated clearly, and revenue or expenditure should be used – both in a transparent manner – whilst avoiding the creation of ‘virtual funds’ which are nothing more than hidden forms of wealth tax. One need only recall the history of FondInps, or the public treasury fund fed by severance pay (TFR) left with the employer.

It is time to state clearly that the public pay-as-you-go pension system, given the negative demographic trends and the state of the labour market, faces sustainability issues: either revenue (contributions and taxes) must be increased, or the retirement age raised, or the conversion coefficients revised. Public pension schemes are all pay-as-you-go, whilst funded schemes are all private; if a public funded scheme does not exist, there must be a reason. And it is not just a question of returns: as theoretical models demonstrate, in the long term the returns of the two systems tend to converge. Historically and over the long term, however, funded schemes appear to offer higher returns. The truly crucial aspects are governance, transparency, incentives for market-based management, and the type of investments a public fund would make.

First of all, who would manage this fund? Any kind of public body would be unsuitable for obvious reasons. If a public body were to make the decisions, how would investment decisions be taken? Would the aim be to maximise returns and diversify investments, or to pursue public finance objectives? This fund’s preference for the domestic market could be strengthened, but only on a ‘voluntary’ basis, thereby avoiding portfolio constraints or any guarantee traps. Guarantees may seem like an easy solution, but they open doors from which there is no turning back. Not only are they illogical and inefficient – guarantees are costly, and no one is truly able to back them up – but they are politically dangerous, as they could provide a pretext for claiming that the fund’s resources are, in effect, public. The case of Poland demonstrates precisely that the public guarantee ultimately led the Treasury to take over the funds’ entire assets. Investment decisions must be taken solely by the funds’ boards of directors, for obvious reasons of independence. And we must recognise that if fund managers invest the savings predominantly abroad, there must be a reason for this in terms of returns and diversification.

The reasons for opposing a public pension scheme are clear: to ensure that investment decisions are guided solely by economic rather than political considerations, thereby avoiding unproductive or low-yield investments and interference in the management of businesses. Let each pillar retain its current form: the public sector should manage the pay-as-you-go scheme, whilst the private sector manages the funded scheme – this is the most efficient and effective solution.