Here are a few lessons which can be learned from the Italian experiment with privatized Social Security:
1. The average person does not understand, and is incapable of understanding and accepting, the relationship between higher return and higher risk.
2. The Wall Street bankers and economists apparently do not understand this either, so we ought not to be too hard on the average person for their shortcomings.
3. Higher risk investments are always and everywhere inappropriate choices for a fixed income investment plan with near term payment goals.
4. When the going gets tough, everyone will expect to get bailed out, in shameless geometric proportion to their social standing, influence, and personal income.
5. When it comes to economics the average person will suspend their common sense for as long as is possible.
6. Those in positions of power will promote the suspension of common sense and popular delusions for the sake of confidence. This is why it is called a confidence game.
7. If the fundamentals of an economic plan are 'confusing,' seeming to provide superior returns for extended periods of time with no effort, it is a fraud. (eg. the US dollar.)
8. Whatever pension plans are promoted for the public MUST include all government officials, including the Ministers, Legislators, and Judiciary, to have any hope of success.
9. Whenever the private financiers 'help' the legislators make a troublesome problem disappear the eventual losses are certain to be especially heavy.
10. Despite what this Bloomberg story says the US avoided nothing because of voter outrage; the public and private pension funds are simply being stolen. (See #6 above).
BloombergItalian Pensions Sapped by Private Funds Bush BackedBy Andrew Davis and Alessandra Migliaccio
Jan. 5 (Bloomberg) --
Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.
The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.
Prime Minister Silvio Berlusconi’s administration is now considering ways to compensate as many as 1.2 million people who made the switch, giving up a fixed return for private plans linked to financial markets. It’s also letting people delay redemptions on retirement funds to avoid losses after Italy’s benchmark stock index fell 50 percent in 2008, destroying 300 billion euros ($423 billion) in wealth.
Italy’s experience shows how difficult it is to solve a problem facing governments from the U.S. to Europe to Japan as populations age and the old system of taxing workers to support retirees becomes unsustainable.
Bush failed to persuade Congress to let workers put a portion of their Social Security taxes into privately invested accounts as voter opposition increased.
Standard PlanFor a quarter of a century, employers in Italy have paid about 7 percent of each worker’s annual salary into the severance system, called TFR. Workers received lump-sum payouts whether they retired, were fired or simply changed jobs.
Someone earning 80,000 euros a year would receive more than 200,000 euros in TFR after 35 years on the job and more than 60,000 euros after a decade of work. The fund pays a fixed return that aims to exceed inflation.
The program was a tempting target for a government struggling to meet its pension obligations. Italy spends about 14 percent of gross domestic product on pensions, the most in the European Union. Spain spends 9 percent and the U.K. 7 percent.Italy has the EU’s lowest birthrate of 1.3 children per woman. By 2050, the country will have fewer than two working-age people for each person over 65, the lowest ratio in the EU, according to Eurostat, the bloc’s statistics agency.
Pensions CutPrevious governments adopted measures to lower pension payouts and force workers to retire later. Benefits will drop to as little as 30 percent of a worker’s final salary from about 75 percent now, creating an incentive for Italians to seek higher returns by moving severance funds into a complementary plan.
Gaetano Turchetta, a Rome office manager, made the irreversible move to a private plan after a union representative boasted of the potential for 20 percent annual returns. The 43- year-old father of three now says he would sign with “two hands and two feet” if he could switch back.
“What do I want from the government?” he said. “Just not to become a burden on my kids.”
The TFR plan was meant to dent Italy’s risk-averse culture and lure more people to investment funds, said Biagio Masi, head of Banca Sella SpA’s insurance unit, who called the shift a “world-shattering change in mentality.” (
Government as debt dealer for the bankers - Jesse)Low Investment RateEight percent of Italians invested in stocks in 2008, half the level of 2002, according to an Oct. 30 report commissioned by Acri, the country’s savings bank association.
About 80 percent favored keeping their savings in the bank and 25 percent have a private pension or life insurance, the report said.
Money managers such as UniCredit, Italy’s largest bank, and Arca Previdenza, the biggest pension fund manager, lobbied customers to make the change, seeing it as an opportunity to kick-start a moribund fund management industry.
(Fee Seeking - Jesse)Funds under management in Italy have shrunk by a quarter in the past seven years, according to the Bank of Italy. The value of pension funds is equal to about 3 percent of GDP, compared with more than 90 percent in the U.S.
Even with full-page newspaper ads, billboards and telephone hotlines spurring Italians to switch, only 1.2 million people, or 10 percent of the eligible private-sector workers, chose to give up the TFR for private plans before the June 2007 deadline, according to fund regulator Covip. Italian lawmakers approved the reform at the end of 2006. It was part of the 2007 budget proposed by former Prime Minister Romano Prodi’s government.
One might surmise that Treasury is hitting a hard high note on the Three Year Treasury issuance because this is the preferred duration of the central banks of China, Saudi Arabia and Japan among others, on behalf of their people.
