If Italy’s (EWI) economic situation seems dire right now, it should be said that it has capacity to become significantly worse in the next decade. Italy faces a demographic timebomb that is likely to further exacerbate its lack of competitiveness, high corruption, and other major economic issues.
For many developed nations, entitlement programs have become a major source of economic strain. These programs are often designed on a “pay-as-you-go” basis, so that current retirees are largely funded by taxes from the current working age populace. This contrasts with a 401(k) / compulsory savings type system, where one’s contributions go directly to fund their own retirement.
The difference between the two types of systems is expounded upon by the Washington Post’s Robert Samuelson. In his article, “Would Roosevelt Recognize Today’s Social Security,” he explains how American President Franklin D. Roosevelt initially conceived Social Security more as a compulsory savings system, rather than a pay-as-you-go welfare system. While Samuelson is discussing the issue in the context of the US Social Security system, Italy and most of Europe rely on similar “pay-as-you-go” entitlement programs.
Unfortunately, this type of system creates a nightmare scenario for nations with aging populaces. Things are bad enough in the United States, where we’re worried about having only 2 working-age taxpayers to support 1 retiree in the upcoming years (as opposed to 3 or 4). Italy would love to have “our problem”, as it has one of the ugliest demographic scenarios moving forward.