(Jan. 8, 2021) On November 9, 2020, Italy’s Constitutional Court declared unconstitutional a provision in the country’s budget act for the years 2019 to 2021 that reduces certain pensions for a period of five years. (Decision No. 234 of November 9, 2020 (in Italian).)
Pensions Reduced Under Budget Law’s “Solidarity Contribution”
Article 1, paragraph 261 of Law No. 145 of December 30, 2018 on the state budget enables Italy’s National Social Security Institute (INPS) to reduce gross annual pensions over €100,000 (about US$122,000) for a period of five years. Depending on how large an individual’s pension is, it could be reduced by 15% to 40%.
This “solidarity contribution” is intended to achieve cost savings that would finance an extension of early retirement options to close the employment gap between generations of Italians.
A petitioner before the Ordinary Court of Milan contested the basis on which the INPS had calculated his full pension under article 1, paragraph 261 of the budget law, and in particular, the protracted duration of the solidarity contribution. The court found that the challenged provision contradicts, among other principles embodied in Italy’s Constitution, equality before the law, the legality of financial obligations, the right to proportional remuneration for work, and the right to public assistance of citizens who are unable to work and lack means of support. (Italian Constitution (English translation).)
The lower court requested that Italy’s Constitutional Court decide whether the budget law provision is constitutional.
Constitutional Court Weighs Structural Problems in Italy’s Social Security System
The Constitutional Court said determining the reasonableness and proportionality of a contribution imposed on holders of the largest pensions cannot be separated from consideration of the serious structural problems that afflict the social security system, whose sustainability still depends on a “pay-as-you-go” approach.
The Court noted that Italy’s current social security system relies on the principle of solidarity, under which an ever-smaller number of active workers, who often have gaps in their employment, must support the weight of an increasing number of older pensioners through their contributions to social security. The Court acknowledged that the continued aging of Italy’s population and the erosion of its production base have made the pact between generations on which the social security system is built more and more fragile.
Duration of Pension Reduction Is “Self-Evidently Excessive”
Nevertheless, the Court criticized the provision as lacking a legitimate constitutional justification, specifically, a showing that emergency measures based solely on reducing the pension income already earned by citizens who have exhausted their working life is a permanent solution to the vast deficit existing in the Italian social security system. The Court stated that sacrificing the legitimate interests of current pensioners to preserve the purchasing power of other pensioners cannot be considered reasonable when the financial needs underlying the tax measure are not “illustrated in detail” in the challenged law—as required by Constitutional Court case precedent.
In addition, the Court found that the challenged provision constitutes a substantial tax selectively applied to a specific category of taxpayers for a duration that exceeds the three-year budgetary cycle of the law that created the tax. The length of the solidarity contribution is “self-evidently excessive,” the Court stated, and thus infringes the principles of reasonableness, proportionality, and adequacy in social security matters.
Consequently, the Court held that part of the budget law imposing a five-year solidarity contribution unconstitutional.