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129
Age in the Welfare State

throughout Europe most welfare bene¬ts were increasing? Most analysts of
the Italian situation suggest that because short-time earnings replacement
bene¬ts (CIG and CIGS) provided a more generous alternative to regular
unemployment insurance that was favored by both unions and employ-
ers, there was little pressure to upgrade regular unemployment insurance
bene¬ts. This argument certainly makes sense of the period after 1968,
when wholly state-funded CIGS bene¬ts were introduced. But before 1968,
CIG bene¬ts required employer contributions, and in fact Con¬ndustria
throughout the 1950s and early ™60s launched repeated tirades against the
“inappropriate” use of CIG bene¬ts, caused in their opinion by the pre-
dominance of employee representatives on the provincial commissions that
evaluated enterprises™ requests for CIG bene¬ts.
So if Con¬ndustria was not wedded to the idea of using CIG bene¬ts
as an alternative for unemployment insurance in the 1950s and 1960s, and
if in any case the short-term earnings replacement schemes covered only a
fraction of Italy™s unemployed, why did the regular unemployment bene¬t
remain so low? Employers during this period espoused low unemployment
bene¬ts for the standard motivations related to preserving work incentives
and keeping labor costs low when Italian industry was pursuing an essen-
tially export-oriented development strategy. And through the late 1950s,
Italian unions, which were by and large excluded from labor policy making,
were probably too weak to counter Con¬ndustria™s efforts to keep unem-
ployment insurance bene¬ts low (Regalia 1984, 54). Unemployment bene-
¬ts in the 1950s and early 1960s remained low primarily because employers
wanted it that way.
By the middle of the 1960s, however, unions were better positioned to
make demands of employers and the government. And yet raising the level
of unemployment insurance bene¬ts remained a low priority. The electoral
strategy of the Left demanded, paradoxically, that unemployment bene-
¬ts remain low. Agricultural employees (as opposed to the self-employed
in agriculture) were a crucial constituency for the Left and a major focus
of union mobilization during the years when the CGIL still acted as a
“transmission belt” for the PCI. But extending unemployment bene¬ts to
this low-wage group at the ¬‚at-rate level that applied to industrial work-
ers would have been impossible if they were to be funded solely out of
contributions from the agricultural sector. At the same time the Italian
unemployment insurance system received no ¬nancing from general gov-
ernment revenues, and could not hope to do so unless the tax system, which
exempted from payments much of the ruling DC™s base of self-employed
130
Bene¬ts for the Unemployed

voters, was reformed. A basic condition undermining the expansion of any
social policies during this period (and indeed into the 1990s) was the fact
that the Italian tax system was weakened by ineffective taxation of the self-
employed and small businesses. But reform of the tax system was impos-
sible because small businesses and the self-employed were ineffectively
taxed as a reward for their support of the ruling Christian Democratic
Party.
The only way to ¬nance unemployment bene¬ts was thus to subsidize
them with contributions from the industrial sector, a procedure that Con-
¬ndustria vigorously opposed but was powerless to prevent. Combined
pressure from the Left, which favored extension of bene¬ts to agricul-
ture, and the Right, which opposed tax reform, maintained the cross-
subsidization of agricultural unemployment bene¬ts by the industrial sec-
tor. The result was that the unemployment insurance fund, which if it had
only had to cover industrial workers could have sustained a substantial
increase in bene¬ts without raising contribution rates, ran near de¬cit lev-
els. Clearly, low unemployment bene¬ts did not worry politicians nearly as
much as they worried the unemployed. As long as politicians could contin-
ually expand the number of bene¬ciaries by expanding coverage of a frag-
mented occupational system to new groups (which they did until 1977),
unemployment bene¬ts were useful electoral currency even at low bene¬t
levels.


Coverage for Youth Unemployed
The electoral strategies of Christian Democrats and the Left, more than
their ideologies, in¬‚uenced the level of regular unemployment insurance
bene¬ts in Italy and the Netherlands. What about differences in the cov-
erage of youth (and long-term) unemployed? In the Netherlands, this
coverage fell under the Unemployment Assistance Act (Rijksgroepsregeling
voor Werkloze Werknemers, RWW), a part of the General Assistance Act
(Algemene Bijstandswet, ABW) of 1964. While some observers attribute
high levels of social assistance bene¬ts in the Netherlands to the Dutch
culture™s widely shared egalitarian beliefs, more convincing accounts argue
that extensive RWW bene¬ts were a result of partisan competition for votes
in a highly volatile electorate undergoing depillarization (van Kersbergen
and Becker 1988; de Swaan 1988; Cox 1993; de Rooy 1997).6

6 Anticipated natural gas revenues also encouraged a generous mind-set.

131
Age in the Welfare State

In offering RWW assistance bene¬ts for long-term and youth unem-
ployed, the Dutch government brought itself into line with ILO recom-
mendations on unemployment bene¬ts, something that Italy never did
despite being a signatory nation to the same treaty (ILO recommenda-
tion no. 44 of 1934). The problem of youth unemployment has been a
dif¬cult one for Italy for the entire postwar period. Yet the poor results
are not for lack of effort. Unions, employers, left parties, and center-right
parties have been painfully aware of the problem of youth unemploy-
ment, at least since demonstrations in the early days after the war pitted
young unemployed protestors against Roman police and were met with
emergency unemployment provisions. But permanent provisions for youth
unemployed were never established because of the clientelist strategies pur-
sued by the Christian Democrats in of¬ce and the strategic reaction of the
unions and the Left to the DC™s clientelism.
The Left in Italy has consistently advocated expanding active labor mar-
ket policies targeted at young people, and the results are clear. When the
PCI has had signi¬cant in¬‚uence at the national level, if not actual cabinet
representation (as from 1976 to 1979 and 1995 to 2000), and/or when unions
have a strong voice during periods of corporatist policy-making arrange-
ments (as in 1984 and from 1996 to 2001), active labor market policies
aimed at employing young people have emerged. When these conditions
have not been met, such policies have not emerged. Yet active labor mar-
ket policies have by and large failed to reduce youth unemployment in any
meaningful way. Employers have not risen to the bait of subsidies and tax
relief for hiring young unemployed persons. In particular, they chafed at
regulations that required them to hire youths in the order of their enroll-
ment at the government unemployment of¬ces, rather than hiring at will.
For example, a year after the passage of a major youth employment initiative
in 1977, only 6,000 of the almost 650,000 youth unemployed registered on
special lists at the unemployment of¬ces had been hired (Gualmini 1998,
129).
Why, then, given the failure of active labor market programs, has the Left
not advocated a cash bene¬t for youth unemployed? The political Left and
Italy™s unions have continued to place their faith in largely ineffective active
labor market policies combined with restrictive hiring procedures in order
to prevent the DC from mobilizing large numbers of unemployed young
people through clientelist means such as state jobs or special cash bene¬ts.
The position of the union movement in this regard is nicely summed up
by then-Secretary General of the CGIL, Luciano Lama, in a statement at
132
Bene¬ts for the Unemployed

a 1977 union congress on the economic crisis and the problem of youth.
According to Lama, “The central problem is this: work, jobs, not assis-
tance” (Bonadonna 1977, 223). Assistance in the context of tight budgets
and clientelist politics meant personalized measures that could be given
out or withheld at will by the ruling parties. With constrained resources
and a very large youth unemployment problem, any extension of gov-
ernment bene¬ts to the youth unemployed was bound to stop short of
covering everyone in need. And any partial solution would offer the oppor-
tunity for discretionary “assistentialism” that would be a rich resource for
the DC.
The demands of social movements of the unemployed, perhaps because
the best-articulated protests were supported by the unions and left parties,
supported this policy of “refusal of assistentialism” (ri¬uto del assistenzial-
ismo). Leaders of the Organized Unemployed (Disoccupati Organizzati)
movement in Naples in the early 1970s refused offers of state jobs and
unemployment subsidies for their members, in part to dispel rumors that
the movement had been in¬ltrated by Ma¬a and DC operatives seeking to
co-opt desperate youth with such offers (Ramondino 1977).
The lack of comprehensive coverage for youth unemployment played
into the hands of the clientelist electoral strategy of the ruling DC and
their allies, who, with their deep penetration of the state apparatus, could
continue to attract supporters by offering discretionary solutions to the
problems of unemployed individuals. But at the same time, the Left clung
to active labor market policies that employers effectively boycotted, rather
than supporting unemployment bene¬ts that they feared would be admin-
istered in a clientelist manner by the ruling parties. Thus both the Center-
Right and the opposition preferred not to push for unemployment bene¬ts
for ¬rst-time job seekers.


Ideology, Strategy, and the Unemployed
The youth orientation of unemployment policies in the Netherlands is due
to both the high replacement rate of regular unemployment bene¬ts and the
existence of universal coverage that includes ¬rst-time job seekers. In Italy
an elderly-oriented system of unemployment bene¬ts rests on low replace-
ment rates for regular unemployment bene¬t schemes and no bene¬ts at all
for the large numbers of youth unemployed. These key policy provisions
implicated in the age orientation of unemployment policies in Italy and
the Netherlands are products in part of partisan competition. Yet it seems
133
Age in the Welfare State

important to note that these policy outcomes are not as closely linked to the
ideological positions staked out by Social Democratic and Christian Demo-
cratic parties as many scholars of the welfare state (e.g., Esping-Andersen
1985; 1990; van Kersbergen 1995) assert.
While the participation of the Social Democratic PvdA in government
coalitions might explain the generous postwar unemployment provisions
enacted in 1949 and 1954, it cannot account for the generosity of Dutch
unemployment insurance bene¬ts enacted by Liberal governments as far
back as 1916. It is true that the Dutch assistance bene¬t for long-term and
youth unemployed was introduced during a period of PvdA ascendance
that is often described as being characterized by a widely shared progres-
sive, egalitarian ideology. However, other explanations for the introduction
of the assistance law have little to do with Social Democratic ideology per
se: the changing desires of an increasingly professionalized and politically
in¬‚uential network of social assistance providers (Cox 1992, 1993) and the
impact of intense electoral competition as a driver of bene¬ts expansion (de
Swaan 1988; Cox 1992; de Rooy 1997). In the Italian case, it was not so much
the Left™s inability to see an ideologically appropriate program of worker-
friendly unemployment protections enacted, but rather the speci¬c policy
positions assumed by the Left in response to the ruling Center-Right™s suc-
cessful clientelism, that determined the age orientation of unemployment
policies.
Key elements of Christian social doctrine, too, including a focus on fam-
ilies as the primary providers of social assistance, have been mustered to
explain both very high unemployment bene¬ts in the Netherlands and very
low bene¬ts and coverage in Italy. The Netherlands™ strong male-bread-
winner model may be partly responsible for the unusually high level of
spending on unemployment bene¬ts in that country, since bene¬ts must be
high enough to support an entire family (Bussemaker 1992). Yet Italy surely
has just as strong a male-breadwinner orientation, and unemployment ben-
e¬ts remain low. The argument for Christian Democratic in¬‚uence in Italy
typically asserts that subsidiarity doctrine reinforces the need for and ability
of cohesive (Catholic) families to care for their own, thus defusing political
pressure for higher bene¬ts or more adequate coverage for youth unem-
ployed. Neither the Dutch story nor the Italian story about the in¬‚uence
of Christian Democratic ideology on unemployment policies is implausible
on its face, but both cannot be true at the same time. The very indetermi-
nacy of Christian social doctrine™s policy requisites lends credence to the
argument that Christian Democratic parties™ competitive strategies, and
134
Bene¬ts for the Unemployed

not their ideologies, determine the age orientation of the unemployment
policies that they promote.
The policies responsible for the diverging age orientations of Dutch and
Italian unemployment protection systems result from electorally motivated
decision making by politicians and policy makers. But the type of elec-
toral competition that prevails in these two systems “ programmatic in the
Netherlands, particularistic in Italy “ also affects the structure of unem-
ployment bene¬ts programs and thus ultimately their age orientation.
In the Netherlands, politicians eager to claim credit for a generous system
of regular unemployment bene¬ts maintained high replacement rates that
had been instituted prior to World War II, even during periods of high
unemployment. The creation of a universalistic unemployment bene¬ts
system, via extension of unemployment bene¬ts to youth unemployed in
the mid-1960s, was also achieved quite easily, coming as it did during a
period of rapid economic growth, ideological consensus on universalism,
and intense electoral competition.
In Italy, the absence of universal coverage and low replacement rates are
also a response to electoral competition, but of a very different kind. Italian
politicians, on both the Left and the Right, were loath to create a univer-
sal system of bene¬ts because of pressures arising out of the predominant
clientelist mode of political competition. In the 1950s and 1960s, the PCI
and the unions would not push for higher bene¬ts or universalistic cover-
age as long as ¬nancing of unemployment bene¬ts remained squarely on
the shoulders of blue- and white-collar employees. However, the Left was
willing to go along with lower bene¬t levels if it meant bringing agricultural
workers, a key potential support base, into the system. DC politicians, for
their part, saw no reason to raise bene¬t levels as long as they could con-
tinue to expand bene¬ts coverage to new groups of potential clients with-
out imposing effective taxation on their key constituency of self-employed
people. A similar logic dictated denying unemployment subsidies to youth
unemployed beginning in the 1970s. The Left, certain that any bene¬t
administered by a state apparatus thoroughly colonized by the DC would
be used for clientelist purposes, was unwilling to advocate cash bene¬ts for
youth unemployed, and instead supported ineffective active labor market
policies that went ignored by employers.
The age orientations of unemployment policies, as different as they
are in Italy and the Netherlands, came about as a result of policy deci-
sions largely unrelated to the concerns of different age groups in society.
But they affected welfare reform debates and outcomes in the 1980s and
135
Age in the Welfare State

1990s in important ways, often closely linked with the question of what
different age groups deserve from the state.
The extreme elderly bias of unemployment policy in Italy has not been
carefully documented, but it has not gone unnoticed, either. The imbal-
ance had become an issue in policy-making circles in Italy already by the
mid-1980s. In 1980, INCA (Istituto Nazionale Confederale di Assistenza),
the CGIL™s social services agency, expressed frustration at the union™s fail-
ure to acknowledge and correct the dif¬cult situation of workers trying to
get by on regular unemployment insurance. INCA directors, who believed
that the agency™s direct contact with over 150,000 unemployment claimants
each year made it better able than CGIL leaders to appreciate the gravity
of the situation, argued that unions should take a strong position in favor
of equalizing regular unemployment bene¬ts and CIGS bene¬ts (Moretti
and Santamaria 1990). By the mid-1980s, members of the mainstream labor
union leadership had come around to INCA™s position, recognizing for the
¬rst time the potential danger in pursuing policies that were alienating an
entire generation of workers (Giovannini 1999 interview; Giustina 1999
interview). Unions began in this period a new emphasis on providing ser-
vices for ¬rst-time job seekers, unemployed people, and youth in general.
By the early 1990s, progressive politicians, too, had begun to make over-
tures “ for the most part unsuccessful “ to Italy™s younger voters, whom pub-
lic opinion research had shown to have become alienated from unions and
the Left. Elite Italian newspapers began carrying op-ed pieces by respected
scholars and journalists and pointing out the Italian welfare system™s fail-
ure to provide for Italy™s younger generations.7 Around that time, survey
research in Italy also began to document public fears, increasing over time,
that Italy™s lopsided labor markets and welfare bene¬ts would generate
intergenerational con¬‚ict on a level not seen since 1968 (Baldissera 1996a;
¨
1997; Boeri and Tabellini 1999b; Boeri, Borsch-Supan, and Tabellini 2001).
In¬‚uential policy makers, including the director of INPS and several mem-
bers of the welfare reform commission established by the government in
1998, have been outspoken advocates of reorienting Italy™s welfare system
toward the needs of the young.8

7 Il Sole 24 Ore, Italy™s equivalent of the Wall Street Journal, took the lead, publishing early
articles in this vein by demographer Massimo Livi Bacci (1993), political scientist Maurizio
Ferrera (1996a, 1996b), journalist Armando Massarenti (1997), and economist Giuliano
Cazzola (1998a, 1998b).
8 See, e.g., Nicola Rossi™s 1997 manifesto Meno ai padri, piu™ ai ¬gli (Less to the parents, more
to the children). Rossi was a key adviser on welfare issues to former Prime Minister D™Alema.

136
Bene¬ts for the Unemployed

This new emphasis on youth has already borne fruit. The Italian sys-
tem of unemployment protection has undergone important changes since
the regime of the early 1980s. In addition to the switch-over in regular
unemployment insurance from a minimal ¬‚at-rate bene¬t to a 40 percent
replacement rate in the mid-1990s, in 1991 new restrictions were placed
on the use of CIG and CIGS. These restrictions aimed to return the part-
time earnings replacement schemes to their original function as short-term
buffers for narrowly de¬ned crisis situations. Hiring procedures in the state-
run employment of¬ces were reformed in 1987 and 1991, and a number of
active labor market policies focusing on young workers were either intro-
duced or newly incentivized beginning in 1992.
While there is certainly room in the Italian system for more thor-
oughgoing reform, an unmistakable new presence appeared in Italian
welfare reform discussions of the 1990s. The clear disparities in treat-
ment of different age groups generated by the labor market policies of
the 1970s and 1980s have engendered a politics of con¬‚ict around the issue
of age. But at the same time, this very imbalance enabled policy makers and
politicians in the 1990s to mobilize public support behind a shift toward
more youth-oriented labor market policies. Advocating bene¬ts for privi-
leged segments of the working population now plays as a throwback to the
failed and reviled labor market politics of the past, a blatant pandering by
politicians to powerful groups of hyper-protected insiders.
The general outlines of the “miraculous” Dutch reform of labor mar-
ket and welfare policies beginning in the mid-1980s are by this time well
known.9 The implications of these policy changes for different age groups
enjoy less renown. Since 1985 the minimum wage for younger workers
has been reduced, social assistance bene¬ts for young people living with
their parents have been curtailed, the duration of unemployment insurance
bene¬ts has become restricted for younger workers, re-evaluations of dis-
ability bene¬ts have forced many young claimants back to work, and in
general labor market policies targeted at the young have come to include
more work requirements.10 At the same time, early retirement and long-
term unemployment insurance bene¬ts for older workers continue to be
available, and reforms to the disability system have exempted most older
recipients.

9 See Hemerijck and van Kersbergen 1997 and Visser and Hemerijck 1997.
10 On labor market participation policies in particular, see van Oorschot and Engelfreit
1999.

137
Age in the Welfare State

Paradoxically, the relatively even distribution of welfare spending across
age groups in the Dutch system of the 1970s and 1980s has made retrench-
ment of youth-oriented programs easier in the Netherlands in the 1990s.
Public awareness of a distributive justice “problem” between generations
has not developed in the Netherlands, in marked contrast to the keen
concern for the potential for intergenerational strife that surfaces in dis-
cussions about Italian welfare state reform. In Italy, the target of welfare
reforms has become stereotyped as a hyper-protected insider, a resident of
Italy™s fortress labor market. In the Netherlands, the con¬‚ict lines in welfare
reform debates have instead been drawn between the productive “actives”
and the parasitic “inactives” “ who, because of the generosity of the Dutch
welfare system toward the young, were as likely to be young as old. The
age pro¬le of social spending has thus in¬‚uenced the terms of the policy
reform debate by setting standards of fairness around which reformers can
mobilize new coalitions.




138
6

Old-Age Pensions
THE ARCHITECTURE OF
EXPENDITURE




The previous two chapters focused on the denominator of the elderly/non-
elderly spending ratio, exploring the origins of different levels of spending
in Italy and the Netherlands on two key social welfare programs directed at
the non-elderly: family allowances and unemployment bene¬ts. The diver-
gent spending paths that these two countries followed in the post“World
War II period, and the much greater emphasis on spending for youth and
working-age adults in the Netherlands than in Italy, appeared to be a result
of the interaction between the structure of social programs and the kind of
competitive strategies that politicians used to gain support in the electoral
arena.
This chapter focuses on the numerator of the age orientation measure:
pension spending. It argues that the interaction of program structure (uni-
versal or fragmented occupational) and how politicians compete (using
programmatic or particularistic appeals) shapes the development of pen-
sion expenditures in Italy and the Netherlands. In the Netherlands, pub-
lic pensions have been available on a citizenship basis since immediately
following World War II, and political competition has been highly pro-
grammatic. As a result, electoral pressure has not eroded the ¬‚oors and
ceilings that maintain bene¬t levels and eligibility rules at levels con-
ducive to moderate pension expenditures, despite coverage rates of close to
100 percent. Italy, by contrast, provides subsistence-level bene¬ts or above
to only about 70 percent of the elderly. But its highly fragmented occu-
pationalist pension system and particularistic political competition interact
to create immoderate demands for pension spending on the part of both
opposition and incumbents. Expenditure levels have proved extremely dif-
¬cult to curb even when they are quite widely recognized as pathological
for the economic system as a whole.
139
Age in the Welfare State

This chapter focuses on explaining the origins of the policy features
that create divergent pension spending patterns in Italy and the Nether-
lands over the course of the post“World War II period. The ¬rst section
of the chapter outlines pension expenditure trends in Italy and the Nether-
lands, highlighting the two main factors responsible for the lower aggregate
spending on pensions in the Netherlands than in Italy: the level of pension
bene¬ts, particularly the most generous pensions, and the number of pen-
sion bene¬ciaries. The second section of the chapter presents a narrative of
the development of policy features that have affected most strongly the level
of bene¬ts and the number of bene¬ciaries in Italy and the Netherlands:
effective ¬‚oors and ceilings on pension bene¬ts, and limitations on the age
at retirement. Working from this narrative, the third section of the chap-
ter argues that spending on the elderly, far from representing a response
to either the political weight of growing elderly populations or the power
resources of the Left, follows a logic parallel to that observed in youth-
oriented spending. The interaction between the structure of pension pro-
grams and the competitive behavior of politicians shapes the development
of pension expenditures in Italy and the Netherlands, and thus the eventual
age orientation of social spending more generally.


Pension Spending in Italy and the Netherlands
Since at least 1960, pension spending as a proportion of overall social
spending has been signi¬cantly higher in Italy than in the Netherlands
(see Fig. 6.1). In 1960, old-age and survivors™ pensions registered about
55 percent of total nonhealth social expenditures in Italy and only 40 percent
in the Netherlands. Spending patterns continued to diverge through the
1960s and 1970s: pensions as a share of social spending rose to almost
75 percent in Italy in 1979 and continued at very high levels through the
1990s, while in the Netherlands pension spending remained constant at
about 40 percent of social expenditures through the entire period under
study.1 To account for the differing age orientation of social spending in
Italy and the Netherlands, then, we need to understand why pension spend-
ing has consumed an ever-expanding portion of Italy™s social budget during
the post“World War II period, while in the Netherlands pension spending
has never accounted for more than half of total public social expenditures.

1 A slight dip in the pension share of social spending in the Netherlands can be observed during
the early to mid-1980s, when spending on unemployment and disability rose dramatically.

140
80




70




60




50




40




30




20




10




0
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Italy Netherlands




141
Figure 6.1 Pension spending as a percentage of total nonhealth social expenditures, Italy and the Netherlands. Sources:
Varley 1986; OECD 2004. Data de¬nitions differ between the two spending series. The ¬gures from Varley 1986 are adjusted
by the average difference between the two series for 1980“5, when both measures are available.
Age in the Welfare State

Italy and the Netherlands both had fragmented occupational pension
systems prior to World War II (despite proposals to introduce universal
citizenship-based state pensions in both countries before the war). Since
1947, however, Dutch and Italian pension systems have come to be orga-
nized quite differently. In Italy, the pension system has remained occupa-
tionally based and highly fragmented. Even after reforms in the 1990s that
simpli¬ed the pension system in Italy, there remained forty-seven distinct
public pension funds (Baccaro 1999, 128), each with a different set of rules
and different levels of bene¬ts. There is no citizenship right to a basic pen-
sion in Italy, and pension bene¬ts vary dramatically depending on the sector
of employment, contributory history, age at retirement, and year of retire-
ment. The Dutch system as it evolved in the years after World War II is far
less complex. In the Netherlands a basic pension (Algemene Ouderdom-
swet, or AOW) provides guaranteed retirement income for all residents at
a modest level. For a head of household, the AOW pension is equivalent
to the contracted minimum wage in industry, or about 55 percent of the
median wage. In addition to the basic public pension, most Dutch residents
also receive supplementary private occupational pension bene¬ts accrued
during their (or their spouses™) working lives.
The two-tiered system of pension bene¬ts in the Netherlands means
that a signi¬cant portion of total pension spending in the Netherlands is
not re¬‚ected in measures of public social expenditures. What effect does this
private pension spending have on the age orientation of public social spend-
ing? It is unlikely that private pensions would have the same “crowding out”
effect on social bene¬ts for the non-elderly that public pension spending
has. On the other hand, the availability of signi¬cant private pension bene-
¬ts could explain lower spending on public pensions, since private bene¬ts
will reduce demand for high levels of public spending. So, a full compari-
son of spending in Italy and the Netherlands should take into account the
existence of private supplementary pensions in the Dutch case.
Including spending on private supplementary pensions, Dutch pen-
sion spending as a proportion of total social spending is still signi¬-
cantly lower than in Italy. Private pension spending increases total pen-
sion spending in the Netherlands by approximately 25 percent during
the period under study. The total of public plus private pension spend-
ing in the Netherlands is approximately 45 percent of total nonhealth social
spending “ versus Italy™s 60 to 75 percent. The existence of a “second pillar”
of private pensions in the Netherlands has important consequences for
the development of pensions in that country. But it does not explain away
142
Old-Age Pensions

the very substantial differences in spending levels between Italy and the
Netherlands.
If private pension spending does not account for the dramatically lower
share of social spending dedicated to pensions in the Netherlands as com-
pared with Italy, what does? Differences in coverage rates “ the percentage
of elderly who receive pension bene¬ts “ cannot account for the spend-
ing differences. In fact, they make the spending differences more puzzling.
The Netherlands, by virtue of its citizenship-based ¬rst pillar, provides a
pension to virtually all residents over age sixty-¬ve in the Netherlands.2
Arriving at an analogous coverage rate in Italy is somewhat more compli-
cated, since the various pension administration schemes count the num-
ber of pensions disbursed, not the number of recipients. Italy™s national
statistical agency calculated that in 1999, some 28 percent of pensioners
received more than one pension (ISTAT 2000). Since 1960, the num-
ber of old-age insurance pensions disbursed per person over age sixty in
Italy has risen from about 0.5 to a little over 0.6 in 1990. Social pen-
sions, a minor, means-tested bene¬t available to impoverished Italians
over age sixty-¬ve since 1969, have added an additional approximately one
pension for every ten persons aged over sixty-¬ve (Franco 1993, 128“9).
Assuming one pension per person, which quite seriously overestimates the
coverage rate, we arrive at a maximum coverage rate of about 70 percent
in the 1970s and 1980s, compared with nearly 100 percent in the Nether-
lands. A substantially higher proportion of elderly residents are protected
against the risk of low income in the Netherlands than in Italy, yet pension
spending is much higher as a percentage of social spending in Italy than in
the Netherlands.
Another possible explanation for the differences in pension spending
between Italy and the Netherlands concerns the average level of bene¬ts.
If pensions are substantially higher on average in Italy than in the Nether-
lands, that could explain why Italy devotes so much more of its social budget
to pensions. At the aggregate level, this explanation is again unsatisfying.
Public pension spending per person aged sixty-¬ve and above as a percent-
age of GDP per capita is higher in Italy than in the Netherlands for most of
the period 1960“93 (see Fig. 6.2). But the differences are not striking, and
in fact during the 1970s average bene¬t levels were actually higher in the

2 One of¬cial of the main Dutch interest group representing pensioners estimates that about
2 percent of seniors living in the Netherlands are without any pension coverage whatsoever,
though they are eligible for social assistance bene¬ts (Lokhorst 2000 interview).

143
100




90




144
80




70




60




50




40




30




20




10




0
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Italy Netherlands


Figure 6.2 Pension spending per person aged sixty-¬ve and over as a percentage of GDP per capita, Italy and the Netherlands.
Sources: Expenditure data from Varley 1986; OECD 2004. GDP and demographic data from OECD 2003b. Data de¬nitions
differ between the two spending series. The ¬gures from Varley 1986 are adjusted by the average difference between the two
series for 1980“5, when both measures are available.
Old-Age Pensions

Netherlands than in Italy. And if one were to add in the amount spent on
private pensions in the Netherlands, mean bene¬t levels would probably be
much closer throughout the entire period. The rather small difference in
average generosity of public pensions is not responsible for the very large
difference in the level of pension spending as a share of social expenditures
in Italy and the Netherlands.
The large difference in spending levels on public pensions in Italy versus
the Netherlands is due not to the existence of a private second pillar in the
Netherlands, nor to differences in the percentage of the elderly popula-
tion with pension entitlements, nor to differences in the average level of
bene¬ts. What does explain the difference in spending on pensions? Two
factors are most important. First, while pension bene¬t levels at the low
end are much lower in Italy than in the Netherlands, they are much higher
at the high end. High replacement rates characteristic of the most generous
Italian pensions are partly responsible for the very high levels of aggregate
pension expenditure. Second, large numbers of people under the age of
sixty-¬ve receive old-age pensions in Italy. In the Netherlands, as in Italy,
people under the age of sixty-¬ve may receive bene¬ts such as early retire-
ment pensions, disability pensions, or extended unemployment bene¬ts.
But Dutch people under the age of sixty-¬ve may not receive old-age pen-
sions. This small difference accounts for an enormous savings on pension
spending in the Netherlands relative to Italy. Let us consider each of these
factors in turn.


Bene¬t Levels
Different levels of pension bene¬ts for various groups of bene¬ciaries could
account for differences in aggregate expenditures on pensions, all other
things being equal. Pension spending per elderly person (as a percentage of
GDP per capita) does not differ substantially on average between Italy and
the Netherlands. But the amount that individual pensioners receive does
vary widely, both within and between the two countries. Two possibilities
present themselves: pension bene¬ts that are much lower at the low end in
the Netherlands, or much higher at the high end in Italy, could explain the
difference in aggregate expenditure rates. The least generous pensions are
signi¬cantly lower in Italy than they are in the Netherlands, a feature that
accounts for persistently high rates of poverty among elderly people in Italy.
But pensions at the high end are higher in Italy than in the Netherlands,
even if we include the private supplementary bene¬ts that top off most
145
Age in the Welfare State

Dutch pensions. The extreme generosity of the highest Italian pensions
accounts for some of the imbalance between pension spending and other
forms of social spending in Italy.
At the very lowest end of the spectrum of bene¬ts, pensions are quite
meager in both countries. In the Netherlands, the basic AOW pension
is available to any resident, but receipt of the full bene¬t is conditional
on a full ¬fty years of contributions (i.e., years of residency). In practice,
though, the number of substandard pensions in the Netherlands is very
small, since contributions are collected directly from payroll in the case of
employees and as part of the income tax in the case of the self-employed.
Dutch citizens living abroad may pay contributions directly for any years
that they resided outside the Netherlands, thus accruing the necessary ¬fty
years of contributions. As a result, it is only illegal immigrants and legal
immigrants from outside the EU who are likely to receive AOW bene¬ts
of less than the normal level. In 1990, some 6 percent of AOW pensions
were awarded for less than the full level (Sociale Verzekerings Bank data).3
In Italy, the lowest pension bene¬ts are “social pensions” (pensioni sociali),
which account for about 5 percent of public pensions disbursed. These
means-tested pensions were introduced in 1969 in order to provide some
income to elderly Italians who had no other means of support (primarily
women). But the level of the bene¬t was set extremely low, equivalent to
9.4 percent of the average gross wage in 1969. Beginning in 1973, social
pensions were indexed to the rate of in¬‚ation, but even so, by 1980, the
bene¬t was equivalent to only 14.4 percent of the average wage (Ferrera
1984, 415). The level of the bene¬t did not improve substantially until the
reforms of the late 1990s. At the very low end, then, both Italian and Dutch
pensions are quite low.
Stepping one rung up the ladder, after immigrants without full pub-
lic pension entitlements, the next worse-off pensioners in the Netherlands
are people who are entitled to the basic AOW pension but have no pri-
vate supplementary pension. AOW bene¬ts are the sole source of pension
income for about 15 percent of the current elderly (Ministerie van Sociale
Zaken en Werkgelegenheid 2000).4 The AOW pension, like other social
bene¬ts in the Netherlands, is pegged to a social minimum standard that is

3 Of course, any resident of the Netherlands who does not have income equal to the social
minimum “ which is also the level of the full AOW pension “ is eligible for social assistance
bene¬ts.
4 Most of these are unmarried women with no employment history and people who worked for
¬rms that had not established a supplementary pension plan (van Aartsen 2000 interview).

146
Old-Age Pensions

meant to allow full participation in social life. Prior to 1968, AOW bene¬ts
were indexed to a combination of prices and wages in the industrial sector.
Beginning in 1964, the social minimum (and thus the AOW bene¬t) was
set at a percentage of the statutory minimum wage, and in 1968, the social
minimum was fully indexed to the growth of contracted wages in the pri-
vate sector. Beginning in 1970, bene¬t levels were slowly upgraded rela-
tive to the minimum wage, so that by 1980, AOW pensioners were enti-
tled to a bene¬t equivalent to 100 percent of the net minimum wage (in
1999, the net minimum wage was equal to 55 percent of the net average
wage). The purchasing power of the AOW was eroded somewhat in the
late 1980s and 1990s when the AOW bene¬t was temporarily delinked
from growth in the minimum wage as part of a wider agreement to try to
limit social spending and boost labor force participation. Still, the AOW
is widely regarded as a modest but still adequate income for the elderly
(de Jong, Herweijer, and de Wildt 1990; van Aartsen 2000 interview).
Italians who have a limited contributory history but are entitled to some
old-age insurance bene¬ts are the analogous second rung on the ladder of
pension generosity. Such bene¬ciaries are entitled to “minimum pensions”
( pensioni minimi ). If the normal rules governing the relationship between
contribution period and bene¬ts levels were followed, a limited contribu-
tion period would result in a rather small pension bene¬t. However, since
1952, participants in the state-run pension system have been entitled after
¬fteen years of contributions to a minimum pension. The level of this pen-
sion is less than the full bene¬t that would accrue to someone in the same
sector with a thirty-¬ve- or forty-year contribution history, but substan-
tially more than would accrue based on a ¬fteen-year history in the absence
of the minimum pension provision. A combination of state subsidies and
money drawn from the pension system™s reserves makes up the shortfall.
Minimum pensions were introduced for employees in 1952, farmers in
1957, artisans in 1959, and shopkeepers in 1966. Minimum pensions make
up a substantial portion of the total number of pensions disbursed. In 1980,
for example, 60 percent of pensions paid out by the main state pension
administrative body were minimum pensions (data from INPS 1982). The
overwhelming majority of minimum pension bene¬ciaries are in the agri-
cultural and self-employed sectors, and in many cases these pensions supple-
ment other forms of income (other pensions, unreported self-employment
or farm income, etc.). Still, the bene¬t levels are quite low “ equivalent
to about 25 percent of the average wage (Ferrera 1984, 416), versus the
55 percent of average wage granted to Dutch AOW bene¬ciaries. Once
147
Age in the Welfare State

again, the quite low level of the basic minimum bene¬t cannot explain the
dramatic difference in aggregate expenditure levels between Italy and the
Netherlands “ especially since a much greater percentage of pensioners
receives the minimum bene¬t (60 percent) than receives the AOW alone
(15 percent).
At the upper end of the income scale for pensioners, Italy and the Nether-
lands reverse positions. Unsurprisingly, given the lack of private supplemen-
tary pensions in Italy, high-end public pensions in Italy tend to be higher
than their counterparts in the Netherlands. But the total pension bene¬t
including AOW and supplementary bene¬ts does not exceed 70 percent
of the average wage earned in the ¬ve years prior to retirement except in
unusual circumstances. Prior to 1999, legislation surrounding the supple-
mentary pension provision speci¬ed that “quali¬ed” pensions could “not
exceed what society considered reasonable in relation to length of service
and level of salary” (Ministerie van Sociale Zaken en Werkgelegenheid
2000, 12). In practice, this meant a ceiling of 70 percent of the prior wage.
This rule of thumb was formalized in legislation in 1999 that allowed for
a higher ceiling on nontaxable bene¬ts for retirees over age sixty-¬ve with
more than thirty-¬ve years of contributions, but limited the standard bene¬t
to 70 percent of the prior wage.
In Italy, there is no explicit limitation on the maximum pension bene¬t, a
situation that has led to very high expenditures on pensions, despite the fact
that extremely generous bene¬ts are reserved for a relatively small portion of
the elderly population. A series of measures introduced in the 1970s through
1990s aimed to reduce the inequality introduced by high replacement rates
for full pensions. These measures included a system of indexation that used
¬xed-sum increments rather than percentage increases, resulting in greater
relative increases for lower pensions, and a “solidarity tax” on high-end
pensions. Replacement rates in the main state-administered schemes were
capped at 80 percent of the prior wage, but this ceiling was removed in
1988 (Canziani and Demekas 1995, 3). But even at 80 percent, the Italian
pension system had the highest maximum replacement rate of any Euro-
pean country (9). The highest pensions in Italy accrue to private sector
workers with contributory histories of at least thirty-¬ve years. The most
fortunate of these are workers in specialized segments of the private sector,
such as maritime workers, private sector managers, lawyers, or journalists,
whose pensions are on average more than 150 percent higher than those of
industrial workers with full contributory histories, and 300 percent higher
than average full pensions for the self-employed (data from ISTAT 1999).
148
Old-Age Pensions

Number of Pensions
Higher replacement rates for high-end pensions in Italy account for part
of the difference between Italy and the Netherlands in aggregate pension
spending as a percentage of total social spending. The other factor that
contributes most heavily to Italy™s relatively high pension bill is the sheer
number of pensions disbursed on an annual basis. Contributing to this large
number of pensions are two peculiarities of the Italian system: Italians can
receive more than one pension at once and are able to enjoy old-age bene¬ts
at a relatively early age. Almost 30 percent of pensioners in Italy receive
more than one pension from the state (ISTAT 2000).5 This contributes to
higher per-person spending levels than would be indicated by the relatively
modest average bene¬t in Italy. And since recipients of multiple pensions
received bene¬ts roughly 125 percent greater than recipients of single pen-
sions (ISTAT 2000), per-person spending levels are in¬‚ated even further.
A second, and more dramatic, cause of high pension spending in Italy
is the very large number of old-age pensioners under the age of sixty-¬ve.
Fully 42 percent of Italian “old-age” pensioners, some 3 million strong, are
under the age of sixty-¬ve. In contrast to the Netherlands, where the of¬cial
retirement age is sixty-¬ve for both men and women, the retirement age
in Italy has been set since 1939 at sixty for men and ¬fty-¬ve for women.
In the 1980s and early 1990s, older members of the work force in both
Italy and the Netherlands were encouraged to make way for younger job-
seekers through a variety of incentives, including early retirement, extended
unemployment bene¬ts, and disability pensions. Large numbers of workers
between the ages of ¬fty-¬ve and sixty-¬ve thus were effectively retired but
receiving bene¬ts other than old-age pensions in both the Netherlands and
Italy. But as we saw in chapter 5, disability and long-term unemployment
bene¬ciaries were much more likely to be older workers in Italy than in the
Netherlands. Even taking into account a substantial number of early retirees
in the Netherlands, the average age at pensioning is lower in Italy than in the
Netherlands (OECD 1995), resulting in higher aggregate pension liabilities
in Italy.
It is not just the earlier retirement age that accounts for the large num-
ber of young retirees in Italy. The feature of the Italian pension system
that is most responsible for this phenomenon is the “seniority pension”

5 This ¬gure includes disability pensioners, but there seems little reason to suspect that
disability pensioners would be more likely than old-age pensioners to have multiple
pensions.

149
Age in the Welfare State

( pensione di anzianit´ ), an institution introduced in the 1960s that allows
a
workers to retire after a set number of years of service regardless of their age.
In the public sector, employees have been able to retire and begin drawing
a full pension after as few as ¬fteen years of service; in the private sector,
the standard was thirty-¬ve years. In 1998, 2.3 million retirees (14 percent
of all pensioners including disability pensioners) were seniority pensioners
who had retired before the standard retirement age. Of these, one-quarter
were under the age of ¬fty-¬ve (ISTAT 2000). In addition to retiring earlier
and thus costing more over the long run, seniority pensioners also tend to
receive higher bene¬ts than other pensioners. The mean seniority pension
in 1998 was 30 percent higher than the mean standard old-age pension.
The combined effects of more pensioners, longer periods of retirement,
and higher bene¬ts make seniority pensions a particularly pernicious fea-
ture of the Italian pension landscape for those concerned to cut costs, and
indeed seniority pensions have been a prime target of reformers since the
1970s. Italian seniority pensions contribute to the much higher proportion
of total social spending allocated to pensions in Italy as compared with the
Netherlands, where no such institution exists to facilitate early retirement
on a massive scale.
The responsibility for the divergence between Dutch and Italian lev-
els of pension spending as a proportion of total social spending can be
attributed, then, to a combination of policy features that create broad dif-
ferences between the two countries in pension bene¬t levels and the number
of pensioners. Bene¬t levels at both the low and the high ends of the income
scale are affected by policy features such as the de¬nition of an acceptable
social minimum, the availability of private supplementary pensions, the level
of the standard replacement rate, and the existence of specialized schemes
with very high replacement rates. The number of pensions paid out, on
the other hand, is determined both by the proportion of elderly who are
covered and by factors such as the standard retirement age, the possibility
of receiving more than one pension at a time, and the possibility of retiring
with full bene¬ts prior to the of¬cial pensionable age.


Divergent Pension System Development in Italy
and the Netherlands
How can we account for the key policy features that inhibit or promote
the growth of very high replacement rates for some public pensions, and
those that discourage or encourage very early retirement with full pension
150
Old-Age Pensions

bene¬ts? This section focuses on two constellations of policies that prove
particularly important. In the Netherlands, a combination of a well-de¬ned
social minimum, a strong second pillar of private supplementary pensions,
and a ¬rm ceiling on high-end pension bene¬ts works to hold pension ben-
e¬t spending at a moderate level. In Italy, the combination of a low statu-
tory retirement age and the extensive use of seniority pensions dramatically
increases the number of pensioners.


Floors, Ceilings, and Pillars: Determining the Level of Bene¬ts
The Netherlands The existence of a modest social minimum to which
the level of the AOW bene¬t is pegged has contributed to keeping public
pension spending in the Netherlands relatively low, while the existence of
a second tier of private occupational bene¬ts has defused pressure for an
escalation of bene¬ts for higher income earners. By contrast, the absence
of a clearly de¬ned bene¬t ¬‚oor in Italy has not only contributed to high
levels of inequality and poverty among the elderly. It has also, ironically,
in combination with a limited system of private occupational pensions,
resulted in a very high ceiling on public pension bene¬ts, which in turn
contributes to Italy™s high levels of pension spending.
The ¬rst postwar public pension in the Netherlands, established under
Red-Roman leadership in 1947 as an emergency provision, set bene¬ts
at a modest level. Large budget de¬cits (van Zanden 1998, 63) and the
high start-up costs involved in setting up a new pension system offering
bene¬ts for all elderly citizens prohibited setting bene¬t levels at such a
high level that they could be seen as an equivalent to the earnings they were
meant to replace. Indeed, Catholic and Protestant employers™ organizations
strenuously resisted the idea of a universal pension set at such a high level
that it would crowd out private occupational pension funds that they had
set up already before the war. Instead, bene¬ts in the new public pension
system were pegged to the cost of living in different municipalities.
The new pension aimed at providing a “decent” standard of living, as
foreseen by the van Rhijn Commission for Social Security Reform, which
had been convened by the government in exile in London during the war
and presented its report in 1947. Under Red-Roman leadership, the emer-
gency law was replaced with a permanent pension provision in 1956, which
established a more generous, uniform bene¬t level throughout the country,
linked to a combination of price and wage levels. In 1964 all social bene-
¬ts, including old-age pensions, were formally linked to a nationwide social
151
Age in the Welfare State

minimum, an amount that should be enough to cover minimum expenses
for a “sober” lifestyle (Vrooman 2000 interview).
The Dutch system of social security, be¬tting its occupationalist ori-
gins, remains resolutely conceptualized by the public and by politicians as
a system of work-related bene¬ts supplemented by a safety net for those
unable to work (de Jong et al. 1990, 44). However, the belief that the “safety
net” aspect of the system should be based on an adequate social minimum
has from a very early period enjoyed widespread support across the polit-
ical spectrum and among the social partners (van der Veen 2000 inter-
view; Vrooman 2000 interview). Socio-Economic Council recommenda-
tions on bene¬t levels were generally supported by a unanimous consensus
of labor, employers, and government representatives on the council, and
parliamentary debates surrounding the introduction of social legislation
contain almost no discussion of bene¬t levels. The most heated arguments
in both the council and the parliament focused on technical details of imple-
mentation and administration, not on the concept of bene¬ts linked to a
standard social minimum (Cox 1993; Vlek 2000 interview).
Under PvdA rule in the late 1960s and 1970s, the level of the social mini-
mum was substantially upgraded. Not only were social bene¬ts such as
pensions linked to the minimum wage in 1964, but beginning in 1968
Social Democrats in government argued successfully that recipients of min-
imum wages should share more equally in the nation™s growing wealth, and
the level of the minimum wage itself was upgraded substantially relative
to median incomes. At the same time the social minimum was upgraded
numerous times, until ¬nally, in 1980, it reached 100 percent of the net
minimum wage. Why did this improvement in the level of the social mini-
mum not result in a dramatic increase in pension spending, as occurred in
Italy at around the same time?
Although the increases in the minimum wage and improvements in the
indexation of bene¬ts resulted in an improved standard of living for pension
bene¬ciaries, both Social Democratic government of¬cials and the director
of the nonpartisan Central Planning Agency expected that linking bene¬ts
more closely to wages would actually contribute to keeping costs down
(Hemerijck 1992, 325). This strategy failed to contain pressure for wage
growth in the private sector, and resulted in a dramatic increase in social wel-
fare spending, primarily in the areas of unemployment and disability bene-
¬ts. But pension spending did not spiral out of control, unlike in Italy where
it doubled as a share of the national income between 1960 and 1980. And
despite the numerous critiques of the social welfare system that emerged
152
Old-Age Pensions

beginning in the mid-1970s, the level of public pension bene¬ts never came
under attack.
Why did pension spending in the Netherlands resist the in¬‚ationary
tendencies that plagued the Italian system in the 1970s and 1980s, despite
linkage to an in¬‚ation-proof wage index? One possibility is that linking
bene¬ts to an adequate social minimum limits claims for large increases
in bene¬ts because bene¬ts are already adequate. Certainly, once bene-
¬ts were linked to a minimum wage that was increasing rapidly relative to
average wages, arguments based on criteria of absolute need and relative
social justice would have been disarmed. Even more clearly, the second pil-
lar of private supplementary pensions played an important role in defusing
pressure for higher state pension bene¬ts. Demands for “deferred wages,”
or, in the parlance of Dutch industrial relations of the period, “immaterial
demands,” could be pushed onto the private funds quite easily, since the
administration of these funds was explicitly a subject of collective bargain-
ing. With private pensions serving as both a supplementary form of income
and as a pathway for absorbing nonwage demands during collective bar-
gaining, the public AOW could remain at a level appropriate to its original
intent “ a social minimum.
Perhaps more puzzling than the capacity of the AOW to resist upward
pressure on bene¬ts is the resilience of the norm, in place since the early
1960s, setting maximum replacement rates for the AOW plus supple-
mentary pension at 70 percent of prior earnings. Other earnings-related
bene¬ts “ unemployment and disability pensions “ were set at an 80 percent
replacement rate, so it seems natural that there would have been pressure for
upward revision of earnings-related old-age pensions. During tight labor
markets, employers were not averse to exceeding government guidelines
for maximum wage increases (Hemerijck 1992), so it comes as a surprise
that maximum pension bene¬ts should have been so resistant to increases.
The 70 percent norm was established as part of a tripartite agreement in the
early 1960s that set the target level for pensions at 70 percent, but was never
codi¬ed as a matter of public law (Westerveld 2001). The 70 percent norm
was never a subject of debate, though, because if individuals wanted pen-
sion provisions higher than a 70 percent replacement rate, they were free to
take out private insurance in addition to their occupational and state ben-
e¬ts (van Suijdam 2000 interview). Even the trade union confederations
pressed for nothing higher than a 70 percent replacement rate as late as
their 1971“75 Joint Programme of Action (NVV-NKV-CNV Consultative
Body 1971, 34).
153
Age in the Welfare State

In the Netherlands, the early linkage of public pensions to a social mini-
mum adequate to cover living costs for most elderly set a standard of bene¬ts
that has proven remarkably resistant to upward pressure. In particular, since
the elderly are no worse off than any other social bene¬ciaries, and since
during the 1970s the level of bene¬ts grew faster than average earnings, it
has been dif¬cult for advocates of higher pension bene¬ts to make a case
based on either need or social justice. The presence of private schemes
has also defused pressure to adjust public pensions to compensate for wage
restraint. Finally, the ceiling on maximum replacement rates of 70 percent “
high by European standards, but still lower than in Italy “ means that even
the combination of public and private bene¬ts is not high enough to create
truly exorbitant pension expenditures as in Italy.

Italy In Italy, a con¬guration of policy features the reverse of those found
in the Netherlands has led to extremely high public pension expenditures.
The absence of an adequate social minimum, the very limited development
of private supplementary pensions, and the existence of replacement rates
in excess of 80 percent for selected groups of workers all contributed to
Italy™s runaway pension growth in the 1970s through 1990s.
Despite repeated attempts to provide pensions at a level to guarantee
subsistence for the elderly, early steps toward de¬ning an adequate social
minimum did not bear fruit. As in the Netherlands, the principle of a social
minimum was enshrined in Italian law quite early. Article 38 of Italy™s 1947
Constitution stipulated that all citizens unable to work and without means
adequate for subsistence were entitled to assistance from the state. At the
same time, reform commissions called by the government to study the
problem of social security in the 1940s and 1950s fell short of advocating
a universal minimum pension bene¬t. The 1948 report of the D™Aragona
Commission called in general terms for bene¬ts that would provide “min-
imum economic support” (Commissione per la Riforma della Previdenza
Sociale 1948, 5), but the report established that pension bene¬ts should be
tied to the level of prior earnings.
The minimum pension bene¬t was established in 1952 and was designed
to assure minimum living standards for those individuals already covered by
the occupational pension system “ primarily industrial workers and public
sector employees. This left out large numbers of uninsured people, includ-
ing the self-employed and workers in the still-dominant agricultural sector.
Even so, the main employers™ association Con¬ndustria complained that the
minimum pension “contaminated” the “healthy” linkage between earnings
154
Old-Age Pensions

and bene¬ts. It objected that the 8.4 percent contribution levied on payrolls
to fund the minimum pensions was too expensive and argued that the state
should really cover the cost of minimum pensions out of general revenues
(Con¬ndustria 1951, 722“3).
In its ¬nal execution, the minimum pension was far from adequate for the
needs of many of the insured, and as a result poverty even among the elderly
with pensions remained a serious problem. A 1953 report of the parliamen-
tary commission established to investigate the problem of poverty in Italy
cited inadequate pensions as a major cause of poverty among the elderly,
and recommended moving away from an insurance-based system toward a
social security regime that could guarantee a minimum living standard for
all (Camera dei Deputati 1953). Speakers at a conference on the problems
of the elderly convened by the Christian Democratic Party in 1955 noted
that the majority of old-age pensions were below the subsistence level (Il
problema delle persone anziane 1955, 152“3). A spokesman for a Catholic-
run organization devoted to pensioners stated on a radio program in 1960
that according to the Italian statistical agency™s calculations from their lat-
est household budget survey, even the basic industrial worker™s pension fell
short of the subsistence level (Cuzzaniti 1960).
In 1963 a special commission of experts was called by the tripar-
tite National Council on Labor and the Economy (Consiglio Nazionele
dell™Economia e del Lavoro, or CNEL) to report once again on the social
security system™s problems and prospects. The commission recommended
implementing a two-tiered pension system consisting of a basic minimum
pension for all workers adequate to meet living standards, topped off by
occupational, income-linked supplements (CNEL 1963a, 26). The proposal
was rejected, however, and the idea of a basic, universal pension remained
outside the realm of the possible until 1969. Under pressure from unions
and left parties, the major pension reform of 1968“9 contained provisions
for a means-tested pension that would ful¬ll Italy™s constitutional obliga-
tion to provide a basic income for elderly individuals with no other pension
rights. Set at the very low ¬‚at rate of less than one-tenth of average wages,
however, these social pensions ended up looking more like an empty gesture
than like an adequate safety net for the elderly.
Even after many ad hoc improvements in bene¬t levels and years of
indexation to in¬‚ation and/or wages, the minimum pension bene¬t today
amounts to only one-quarter of the average wage, and the social pension
less than 15 percent. As a result of the failure to establish an adequate social
minimum, pressure politics surrounding pensions in Italy has been geared
155
Age in the Welfare State

overwhelmingly toward the acquisition of higher bene¬t levels, even in cases
where bene¬ts were already well above any reasonably de¬ned social mini-
mum. The signi¬cant numbers of the elderly still living in poverty has, until
quite recently, fed into a public perception that Italian pensions are insuf¬-
cient (Baldissera 1996a; 1996b; 1997; Boeri and Tabellini 1999a). This has
opened political space for demands to raise replacement rates, a practice
that results in extremely generous pension provisions for small segments of
the population with the most economic and/or political bargaining power.
At the same time, a low-wage strategy pursued by Italian industry
through the 1960s, much as in the Netherlands, encouraged unions to
pursue pension bene¬ts as a form of deferred compensation. Unlike in the
Netherlands, however, in Italy no system of private occupational pensions
exists to absorb pressure for increased bene¬ts coming out of the collective
bargaining arena. In the absence of a private pension system, the strategy of
using pensions as deferred compensation has led to a dramatic increase in
public pension levels, especially for those sectors where workers have held
the strongest bargaining positions.
What accounts for the absence of private pensions in Italy? As in the
Netherlands, the assets harbored in the system of private pension funds
that had been built up in the late nineteenth and early twentieth centuries
were depleted by in¬‚ation and wartime destruction of real estate and indus-
trial holdings. As in the Netherlands, the interests of both the Church and
employers lay in rebuilding this private system. However, in Italy private
pension funds have played an extremely limited role since World War II.
The weakness of Italian capital markets, unfavorable tax treatment of private
pensions, and the public system of severance payments have all discouraged
private funds from developing (Franco 2000). Furthermore, according to
Franco, the very generous provisions for some in the public pension system
have “both reduced the demand for supplementary plans and the resources
available to ¬nance them” (10). The relationship between the generosity
of public pension provisions and the development of private sector alter-
natives is a complex one, with causal arrows running in both directions.
However, it is clear that very generous public bene¬ts for select groups and
strong private sector supplements do not coexist nearly as easily as do low
public bene¬ts and strong private supplementary funds.
If in the Netherlands strong upward pressure on pensions as a form of
deferred compensation was absorbed by the system of private occupational
funds, the tacit agreement to limit total pension payments to a 70 percent
replacement rate kept maximum bene¬ts within reasonable limits. In Italy,
156
Old-Age Pensions

however, norms limiting the level of high-end pension bene¬ts have been
rather weaker. A government pension reform plan in 1952 proposed a rate
of return on contributions that would have given a 90 percent replacement
rate for average earners after forty years of contributions, and a 120 per-
cent replacement rate for white-collar employees retiring at age sixty-¬ve
(Con¬ndustria 1952, 720). While these generous provisions were not intro-
duced (partly because of Con¬ndustria™s insistence that workers should not
be rewarded for staying on past the age of sixty), they signal that very high
replacement rates were by no means anathema to policy makers even at a
time when the majority of Italians still had no pension coverage at all.
The pension reform of 1969 established a new de¬ned-bene¬t system
that was not linked directly to contributions, and thus a maximum replace-
ment rate had to be speci¬ed. At this time an upper limit on pension-
able earnings was also introduced. At the behest of the trade unions and
over the opposition of Con¬ndustria (Regini 1981, 137“8; Regonini 1984,
100), the maximum replacement rate was set at a rather high 80 percent
of prior earnings, which served the purpose of reducing special treatments
for groups such as professionals and journalists while still resulting in an
increase in bene¬ts for industrial workers. Many groups, including pub-
lic sector employees and other professional groups, were exempt from this
ceiling. But even for pensions subject to the 80 percent ceiling, the system of
indexing pensions to wage growth meant that real replacement rates could
in fact rise well above the 80 percent level as long as wages continued to rise
in real value, as they did through the 1970s.6 And the sky became the limit
for all pensions after 1988 when the 80 percent ceiling was lifted. The frag-
mentation of the Italian pension system made it feasible to grant very high
pensions to those segments of the work force who had the most bargaining


6 To understand why this is the case, think of a pensioner, Antonio, who retires with a pension
equal to 80 percent of his earnings in the last year of his employment. Perhaps he earned $100
a week as an employee, and thus his pension in his ¬rst year of retirement is $80 per week.
Three years after his retirement, however, workers have received substantial concessions on
the wage front, and wages have increased by 20 percent. So his colleague Giuseppe, who
retired three years after Antonio, earns $120 a week in his last year. Half of this increase
is due to in¬‚ation, so Giuseppe™s real wage, relative to Antonio™s ending salary, is only
$110. But since Antonio™s pension has been fully indexed to increases in wages, he now
receives a pension equal in real, in¬‚ation-adjusted terms to 80 percent of $110, or $88.
Antonio™s pension three years after his retirement is now giving him a bene¬t equivalent
to a replacement rate of 88 percent, not 80 percent. And for every year that wage growth
outpaces in¬‚ation, the effective replacement rate on Antonio™s pension will make similar
gains.

157
Age in the Welfare State

power either contractually or because of their close relationship to the polit-
ical parties in government, for example, airline pilots working for the state
monopoly. The absence of strong norms (much less legislation) preventing
pensions from rising above a certain level made this development almost
inevitable.
The combined lack of effective ¬‚oors and ceilings on pension bene¬ts
has contributed to a costly pension system in Italy, which accounts for part
of the difference in the age orientation of the welfare states in Italy and the
Netherlands in general. But the level of pension bene¬ts is only part of the
explanation. Another key to understanding the high relative cost of the Ital-
ian pension system lies in appreciating the very high number of pensioners
in Italy and the political decisions that undergird this phenomenon.


The Effective Retirement Age: Determining the Number of Pensions
As we saw in the ¬rst section of this chapter, a fundamental difference
between the Italian and Dutch pension systems that helps to explain the
dramatic difference in aggregate spending levels is the age at which most
people retire. Retirement occurs much earlier in Italy than in the Nether-
lands because of a lower statutory retirement age, and because of provisions
that have made it possible for workers to retire at full pension after as few
as ¬fteen years of service, whatever their age. What is the genesis of these
differences, and how has the early average retirement age in Italy been main-
tained for so long despite the obvious pressure that it puts on government
spending?

The Statutory Retirement Age International Labour Of¬ce conventions
in the 1930s and 1940s recommended a rather low retirement age. Signatory
nations were required to provide old-age insurance for workers over the age
of sixty-¬ve, but were encouraged to set the retirement age lower than that.
A 1933 ILO advisory on pensions advised that “it is recommended, as a
means of relieving the labor market and of ensuring rest for the aged, that
the pensionable age should be reduced to sixty, in so far as the demographic,
economic and ¬nancial situation of the country permits” (ILO 1933). The
1944 convention on pensions required that “the minimum age at which
old-age bene¬ts may be claimed should be ¬xed at not more than sixty-¬ve
in the case of men and sixty in the case of women: Provided that a lower
age may be ¬xed for persons who have worked for many years in arduous
or unhealthy occupations” (ILO 1944).
158
Old-Age Pensions

In the Netherlands the retirement age for the 1947 emergency pensions
was set at sixty-¬ve, a limit that remained in place throughout the ten years
of negotiations that led up to passage of the permanent act on public pen-
sions in 1956. The precedent for a retirement age of sixty-¬ve was set in
pension legislation enacted prior to World War II: the 1913 Invalidity Act
and the 1922 pension provisions for public servants both set the retirement
age at sixty-¬ve. Widespread youth unemployment in the immediate post-
war period was addressed through an active emigration policy rather than
by encouraging older workers to retire early, as per ILO recommendations.
When youth employment again emerged as a problem in the late 1970s,
“exit pathways” such as disability pensions, extended unemployment ben-
e¬ts, and private early retirement provisions provided the means for older
workers to comply with societal demands to make room for younger work-
ers (de Vroom and Blomsma 1991). As a result, there was little pressure
to lower the retirement age. In union documents stretching from the early
1950s through the late 1980s, there was no mention of any demands for a
lowering of the retirement age (NVV 1951“75; FNV 1977“87).
By contrast, the Italian retirement age adhered more closely to ILO
guidelines. This adherence was made easy by the fact that under the Fascist
government, the retirement age had been reduced from age sixty-¬ve to age
sixty for men and ¬fty-¬ve for women. The rationale for this change was
precisely the same as that stated in the 1933 ILO convention: to ease the
shortage of jobs by encouraging older workers to exit. This of course also
dovetailed neatly with the Fascist government™s pronatalist agenda, which
would have been impossible to maintain in the absence of jobs for workers
with young children (Lapadula and Patriarca 1995, 75). The 1939 retire-
ment age was reaf¬rmed in 1952 during the ¬rst comprehensive postwar
overhaul of the pension system, again because of concerns about a shortage
of jobs for younger workers (Con¬ndustria 1953, 720“1).
The 1952 pension reform law did, however, make it possible for work-
ers to retire up to ¬ve years after the retirement age, with a concomitant
increase in bene¬ts of up to 22 percent for women and up to 40 per-
cent for men. Con¬ndustria argued at the time that the increase in pre-
miums necessitated by this provision constituted an unfair tax on workers
(Con¬ndustria 1952), and by 1955 it had come to the conclusion that as long
as it was impossible to force workers to retire at age sixty, the retirement age
should simply be raised (Con¬ndustria 1955, 81). In 1957, the Christian
Democratic Party held a second conference on the problems of the elderly,
during which speakers pleaded for a consideration of the possibility of
159
Age in the Welfare State

raising the retirement age by at least ¬ve years. As more than one par-
ticipant remarked, this would make it possible to raise pensions by 40 to 50
percent over current levels, while maintaining contribution levels at a con-
stant rate (L™invecchiamento della popolazione 1957, 29). One participant also
noted that the low retirement age did not result in any increase in jobs for
younger people, citing a recent survey carried out by INPS that found that
90 percent of old-age pension recipients between the ages of sixty and sixty-
¬ve continued to carry out some form of paid labor (L™invecchiamento della
popolazione 1957, 53). Even pensioners™ organizations had by 1960 come
to the conclusion that raising the retirement age to sixty-¬ve was a viable
solution to the problem of low pensions (see, e.g., Cuzzaniti 1960).
In the 1960s, pressure continued to mount for an increase in the retire-
ment age. The CNEL™s 1963 report on social security also noted that Italy™s
low retirement age made it dif¬cult to raise bene¬ts to the level that the
commission™s members thought necessary (CNEL 1963b, 185). By 1967,
the ILO had begun to soften its position on retirement ages, and in its
convention on invalidity, old-age and survivors™ bene¬ts of that year in
fact allowed for retirement ages higher than sixty-¬ve “as may be ¬xed by
the competent authority with due regard to demographic, economic and
social criteria, which shall be demonstrated statistically” (ILO 1967). The
government™s and unions™ proposals in Italy for a major pension reform
in 1968 contained provisions for an increase in the retirement age, and
this provision was nearly passed, before opposition from current workers
who opposed an extension of their working careers scuttled the agreement
(Regini and Regonini 1981, 227). Failed reform proposals in 1984, 1988,
1990, and 1991 all stipulated an increase in the pensionable age to sixty-¬ve
for both men and women, but in no case was an increase in the retirement
age enacted.

Seniority Pensions Differences in statutory retirement ages “ higher in
the Netherlands than in Italy “ account for some of the difference in pension
spending levels between the two countries. However, much of the high
pension burden in Italy is accounted for not by a low statutory retirement
age, but rather by a provision allowing many pensioners to retire at full
pension well in advance of the statutory retirement age.
Seniority pensions were introduced for public sector workers in Italy in
1956, allowing workers to retire with full pension after twenty-¬ve years of
service (twenty years for women) regardless of whether they had reached
the retirement age. In 1962, the CGIL made seniority pensions for private
160
Old-Age Pensions

sector workers a key demand, citing the rationale that other groups already
enjoyed this privilege (CGIL Segreteria Generale 1962, 224). A provision
permitting retirement with full bene¬ts after thirty-¬ve years of service was
introduced for private sector workers in industry, agricultural workers, and
artisans in 1963, though this provision was not implemented until 1965.
In 1968 the three major union confederations initially agreed with a
government proposal to eliminate seniority pensions in the private sector
in return for higher pension bene¬ts. However, the metal workers™ union
opposed this trade, since their workers enjoyed relatively stable employment
and were thus particularly likely to actually be able to enjoy the seniority
bene¬t (Regini and Regonini 1981, 227). Under pressure from this strong
category union, the CGIL withdrew from the accord with the government
and initiated a series of general strikes in 1968 and 1969. In the pension
accords of 1969“70, unions were able to defend the seniority pension and
win improved bene¬ts. In a process of “leapfrogging” (Baccaro 1999, 132),
in which public sector employees made up for a relative decline in their
position vis-` -vis private sector workers with even stronger improvements
a
in their own situation, a new law regulating seniority pensions in the public
sector was introduced in 1973, permitting retirement at full pension after
twenty years of service (¬fteen for women). Another law in 1979 introduced
further improvements for public sector workers.7
The full extent of the drain on the pension system that would be created
by seniority pensions did not become clear until the second half of the 1980s,
when the ¬rst generation of workers with continuous employment histories
and full pension rights entered into the system. Within the main private
sector pension fund, the number of seniority pensions tripled between 1980
and 1992, and by the early 1990s, seniority pensions constituted the major-
ity of all new pensions granted by the largest state-administered pension
fund (Fondo Previdenza Lavoratori Dipendenti, or FPLD; Lapadula and
Patriarca 1995, 24). The failed government-sponsored pension reform pro-
posals of the 1980s and early 1990s uniformly called for a revision of the
public sector rules to bring their seniority bene¬t into line with the thirty-
¬ve-year period in effect for private sector workers. This goal was ¬nally
achieved in 1992 with Amato™s reform, which phased in the thirty-¬ve-year


7 Law 1979/29 established that public sector workers could count seniority accrued while
working in another sector, a provision that the Treasury Ministry commission predicted
would result in a dramatic increase in the number of public sector seniority pensions
(Ministero del Tesoro 1981, 74).

161
Age in the Welfare State

period for public sector workers. Berlusconi™s 1994 reform proposal called
for even more serious cuts to seniority rights. In fact, the vast majority
of the savings envisioned by his plan came from curtailing the seniority
bene¬t and imposing a 3 percent per year penalty on pensions for workers
who retired before the age of sixty-¬ve (Baccaro 1999, 142). But Berlus-
coni™s reform plan failed, and it was not until the Dini reform of 1995 that
the seniority pension was ¬nally dismantled “ and even then, over a long
phase-in period.
What accounts for the resilience of Italy™s very low effective retirement
age? Criticism of seniority pensions has been loud and sustained, at least
since the 1980s. A 1981 report of a study commission convened by the
Treasury Ministry report deemed Italy™s early retirement age “anomalous”
and argued that it was “absolutely necessary” that the retirement age be
raised and that the discrepancy between the retirement age for men and
women be eliminated. It went on to call for an “urgent” reform of the
public sector seniority pension system, bringing it in line with rules in the
private sector (Ministero del Tesoro 1981, 71“5). With regard to the situ-
ation in the private sector, INPS president Giacinto Militello declared at a
1987 conference on “The Future of the Italian Pension System” that “the
progressive raising of the retirement age appears to be a necessary instru-
ment for keeping predictable increases in pension spending under con-
trol” (Militello 1987, 10). A 1988 conference on social insurance convened
by INPS also recommended raising the retirement age as soon as possi-
ble (Alvaro and Carloni 1989, 281), as well as harmonizing rules between
the public and private sectors. And Italy™s main union confederations have
demonstrated a willingness to support raising the retirement age and elim-
inating most seniority provisions, as evidenced by their support of reform
proposals in 1968, 1992, and 1995. So why has the low effective retirement
age not been raised?
Some analysts argue that structural features of the Italian economy have
played an important role in preventing the introduction of a higher retire-
ment age and more stringent early retirement rules. INPS (1989, 279) sum-
marizes the debate over raising the retirement age as a tension between two
con¬‚icting goals: reducing expenditures and responding to an inadequate
supply of employment opportunities. Lapadula and Patriarca (1995) essen-
tially agree, arguing that the “backwardness” of the Italian economy and its
business enterprises are at the root of the “delicate” problem of reforming
seniority pensions. In this view, Italian ¬rms have used seniority pensions
as part of a system of “permanent restructuring” based on restricting labor
162
Old-Age Pensions

supply rather than ¬nding ways to retrain and use labor more effectively.
The ¬scal crisis of the 1980s and 1990s introduced pressure to eliminate
seniority pensions. But the prospect of radically reducing access to senior-
ity pensions is a frightening one given the continuing shortage of jobs, and
political opposition to cuts has been ¬erce. This structural explanation for
the resilience of seniority pensions in Italy™s private sector does not, how-
ever, explain extremely generous provisions for public sector workers, who
would presumably be protected from market pressures in any case.
Public opinion surely plays a role in maintaining the low retirement age
and seniority pension bene¬ts. In a 1994 nationwide poll, 71 percent of
Italians opposed raising the retirement age (Baldissera 1997). As Regonini
(1990, 359“60) remarks, issues such as raising the retirement age and har-
monizing the rules governing early retirement between public and private
sector workers are particularly unlikely to be passed by legislators, because
the groups that would be affected are so large and cross over party lines. So
political pressure from the electorate at large has made it dif¬cult to raise
the effective retirement age in Italy, even when of¬cials at the Ministry
of Labor, the Ministry of Finance, the governing board of INPS, and the
confederal level of the main unions agreed that it would be desirable.


Explaining Differences in Pension Spending: Competing Hypotheses
The preceding section outlined the political and institutional dynamics
underlying several key policy features that determine the level of pension
expenditures in Italy and the Netherlands. What do these dynamics tell
us about how social policies become oriented toward different age groups
in the population? And how do they re¬‚ect on existing claims about the
sources of pension spending in particular?
This section makes the case that aggregate levels of pension spending
are in¬‚uenced by a combination of how pension systems are structured and
how political competition either reinforces or works to undermine those
structures. Citizenship-based pension programs will lead to lower aggre-
gate pension spending because uniform bene¬ts for all citizens make it easy
to calculate future costs and dif¬cult for politicians to use increased pen-
sion bene¬ts as a currency of political exchange. Fragmented occupational
pension programs, by contrast, provide both a smokescreen to hide behind
and the currency with which politicians may bargain should they wish to
contract private deals with small segments of the electorate. Particularis-
tic political competition can thus be expected to undermine attempts to
163
Age in the Welfare State

introduce universal citizenship-based bene¬ts and maintain pension policy
structures that are conducive to very high expenditure levels.
But the cautious reader will surely wonder whether this argument is
unnecessarily complex. After all, a large and growing literature in compar-
ative political economy points to the role of power resources in determining
levels of (or changes in) pension spending. Variations in the power resources
of labor and the Left, on the one hand, or the elderly, on the other hand, are
said to determine how much governments spend on old-age pensions. It is
worth addressing these arguments carefully, since they have such intuitive
force.
The left power resources argument holds that pensions are more gen-
erous and more widespread where representatives of working-class groups
are politically powerful. This political power may come about as a result of
strong and centralized labor unions, neo-corporatist labor relations institu-
tions that include labor in policy making, left parties that command a large
share of the vote, or control over key governmental positions. Whatever
the avenue by which the working class arrives at its strength, the outcome
is expected to be broad, encompassing, and generous pension provisions.
On its face, the claim that left power resources could be responsible
for higher pension spending in Italy than in the Netherlands is problem-
atic. Esping-Andersen (1990) and others characterize the Netherlands as
an “almost Social Democratic” country, while no one would mistake Italy
as anything other than a stronghold of Christian Democracy. The Dutch
PvdA has been a partner in government for much of the postwar period,
while in Italy the main leftist party, PCI (which changed its name in 1989
to the Democratic Party of the Left, or PDS), was shut out of government
until 1994. (The Socialist Party of Italy, or PSI, cannot properly be consid-
ered a leftist party, since during the postwar period it has followed a centrist
policy agenda when it has followed one at all.)
Dutch unions, too, have been much more closely involved in policy mak-
ing than have Italian unions, by virtue of the multiple corporatist institutions
in which they participate and in which many key policy decisions are made.
The most important of these institutions, the SER, is a tripartite body that
the government was obliged until the mid-1990s to consult before submit-
ting any social policy legislation to Parliament for consideration. Even after
this obligation was removed, governments have continued to honor it in
practice, voluntarily submitting policy proposals to the SER for review. By
most de¬nitions, then, the Left has had more power in the Netherlands
than in Italy for most of the postwar period, yet pension spending is lower
164
Old-Age Pensions

in the Netherlands than in Italy. The prediction that left power resources
will lead to higher social welfare spending, including pensions, is not borne
out by a broad characterization of these two cases.
But this broad portrait of Social Democracy in the two countries misses

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