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Italy's pension costs may remain high until 2050

Italy's attempts to cut pension spending, among the highest in the European Union, are failing with costs projected to remain close to current levels for the next 43 years, according to a report by the state auditor.

Pension spending will only decline to 13.8% of GDP in 2050 from 14.1% in 2005, according to a 243 page report on the auditor's Web site. That's even after three shakeups to the system, including a 2004 law raising the retirement age. Prime Minister Romano Prodi's government is divided over the urgency to change the pension system again, after warnings by the European Commission and rating agencies over Italy's debt and spending. The country has the third-lowest birth rate in the EU and contributions to the system won't keep pace with retirement spending as the population ages. „This data shows that more is needed on the pension front,” said Maurizio Binelli, a senior economist at Abaxbank SpA in a telephone interview. Finance Minister Tommaso Padoa-Schioppa has said the existing model must be „corrected,” though changes were left out of the 2007 budget. His deputy, Vincenzo Visco, said on January 23 that cutting pension spending „is not a priority.”

Former Prime Minister Silvio Berlusconi, who headed the last government, tried to deal with Italy's pension system, passing legislation in 2004 that raises the age at which workers can retire to 65 for men and 60 for women. Those changes don't begin to take effect until 2008. Lamberto Dini's 1995 government expanded a 1992 law, named after then-premier Giuliano Amato, that changed the way pensions were calculated to one based on contributions paid rather than a system based on income earned at the end of a person's working life. (Bloomberg)