Many people in Italy think that at retirement age they will be guaranteed a pension because when they worked they paid contributions to INPS.
Unfortunately, this is not the case!
The Italian pension system works differently. The system is called a pay-as-you-go system. What does it mean? It simply means that the contributions that today’s workers turn over to the INPS coffers are broken down immediately and are used to pay the pensions of today’s retirees.
People often believe that INPS is like a safe: every month I set aside money (contributions), and when I retire I can withdraw that money every month, perhaps increased and revalued.
No. INPS is like a bank teller or ATM. Workers monthly deposit money to the ATM and retirees withdraw it.
As you can see, it is a system that stands if there are more workers than retirees.
If a worker pays an average of 500 euros per month in INPS contributions to this hypothetical ATM, an INPS retiree to withdraw 1,000 euros per month from the same ATM will only be able to do so if there are 2 workers for every retiree (to quote, reminds me a bit of the Madoff story).
You may have already guessed the serious problem that we are now inexorably heading for and that most likely all of us at that ATM, at the time of our retirement, will at best find it to be of very very low value compared to our final salary.
What will happen when there is a line to withdraw and few people pouring in? Perhaps you have realized that it is time to think ofalternative solutions to secure the future welfare that the state will not be able to provide for you.
From ISTAT data currently about 1 in 5 people in Italy is over 65 years old; by 2060 we will have 1 in 3 residents over 65.
The INPS tables below tell us that today compared to about 15,500,000 retirees with an average gross pension of 1,500 euros, we have about 25,000,000 contributing workers.
The ratio is already no longer 2 workers to 1 retiree.
In addition to longevity another dynamic that affects the sustainability of our pension system is the birth rate, but even here we all know that the data are negative; there are statistics that say that within 20 years there will be 5 million fewer Italians.
What does this mean for our pensions? It means that 2030 is considered year zero of pensions, it means that in 8 years we will have more people retired than working.
Not only are there fewer people born and therefore there will be fewer workers in the future (unless another 5 10 million foreigners come to Italy to work), but workers each year on the seniority bracket are growing.
This is also due to the idea that in order to curb the total pension freeze, action must be taken on lengthening the retirement age. That is, to make sure that more and more people remain contributing workers and move on to collect as retirees as late as possible.
In Japan, slightly longer-lived than us, they are proposing to extend the retirement age to 85.
Another way to curb the risk of no longer being able to pay future pensions is to make these pensions lower in economic terms than they are today.
The way has already been found. In fact, already today the retributive method is no longer in use and replaced with the contributory method. Under the retributive method, the pension benefit was calculated on the income received in the last years of work, so it was a system that did not take into account the actual contributions made.
The latter way of calculating the pension sum is clearly less advantageous for the future retiree. In fact, in some cases his pension will be as much as 60 to 70 percent of his final salary.
Let’s give two examples:
- private employee born in 1970 with 25 years of contributions and €30,000 gross income, assuming a career advancement of 2 percent per year will retire at age 66. The last annual salary as a worker will be €37,000 gross and the pension instead €23,000 with a replacement rate of 61 percent. In practice, he will receive a pension 40 percent less than his final salary. Almost half! If a person lived on 1,600 euros a month, in retirement he or she will have to get used to doing so on just under 1,000 euros. After a lifetime of work.
- self-employed woman born in 1990 with 5 years of contributions and € 40,000 gross income, assuming a career advancement of 2% per year will retire at 66 years and 4 months. The final salary will be €72,000 gross and the pension €26,000 with a replacement rate of 36 percent. That’s right! In this case your pension will be almost 70% less than your final salary. If she used to live on 2,000 euros a month, in retirement she will have to do so on about 700 euros a month.
On the Sole 24 Ore website you can calculate about how much your pension will be. Click here
As you can see today it is essential to plan for an additional future income to go along with one’s retirement (assuming there will be one).
How to do it? Meanwhile, starting as soon as possible. Every month lost is not inconsiderable future economic damage.
How do you create income? Saving and investing in the right way.
Trading can be a form of immediate second income that you can immediately invest in the market with various financial instruments, even with an Accumulation Plan, and create for yourself a supplementary form of retirement. We look forward to you discussing it together in our community!