At the ripe old age of 53, Edoardo has retired and devotes his time to his vegetable garden, travelling, reading and work-outs at the gym. Eleven years ago, Edoardo, who lives just outside Rome, was offered early retirement from his middle-management job at a high-street Italian bank, writes Paddy Agnew in Rome.

Systematic mismanagement and questionable accountancy practices had plunged the bank into a crisis that not only prompted a national scandal but also required a state-funded rescue plan. Part of the rescue plan, inevitably, involved redundancies.

With 20 years of pension contributions behind him, Edoardo was entitled to a "baby pension", which has meant that, for the past 11 years, he has been paid approximately 80 per cent of his former salary.

Furthermore, he is entitled to that pension for the rest of his days.

The important thing to understand here is that Edoardo's pension is not paid by some private pension fund of the bank but by state body INPS, the National Institute for Social Security. Edoardo's bank employers had used early retirement to make the state pay for his lay-off.

Even if "baby pensions" are now a thing of the past, having been eliminated by limited pension reforms in 1995, the underlying principles remain the same today.

The Italian state-funded pensions system is generous with regard to levels of contribution and to retirement age requirements.

Under current Italian law, people who have worked (and paid pension contributions) for 35 years can retire at the age of 57, with many of them being entitled to a pension equivalent to 80-90 per cent of their final-year salary. Such retirement requirements explain why only 28.1 per cent of Italians aged 55 to 64 work, as compared with an EU average of 38.8 per cent.

For much of the last decade, economic analysts have been arguing that Italy, in common with France and Germany, will sooner or later have to deal with what is often termed a "demographic time bomb".

Crisis is around the corner for a country with both zero population growth rate (1.3 babies per woman) and increasing numbers of pensioners. The problem, of course, is heightened life expectancy.

When Otto Von Bismarck first introduced a Prussian state pension in 1889, the retirement age of 65 was 20 years greater than life expectancy. The equivalent retirement age today would be 96, and not 65 as in many EU countries.

By 2030, according to economic research institute Eurispes, for every Italian worker, there will be another Italian collecting a state pension. The day when there will be more Italians collecting a pension than paying pension contributions is not far off.

The Italian pensions system costs 14.2 per cent of GDP (the EU average is 10 per cent) while INPS starts off each year with a €36 billion deficit. Eurispes calculates that, at present rates, pensions will account for 16 per cent of GDP by 2030.

Not only the economic analysts but also the European Commission argue that, sooner or later, an Italian government will have to steel its nerve and bite on the pensions bullet. It was in this context that Prime Minister Mr Silvio Berlusconi caused a major fuss last weekend when he argued that the time has come to raise the retirement age by five years to 62, in order primarily to reduce pension costs.

As of now, the nature and timing of proposed pension reform are far from clear. The prime minister has suggested that the retirement age should be raised to 60 by 2010 and to 62 at a future, unspecified date.

Other proposals include a series of incentives, including a de facto 32.7 per cent rise in salary (via the payment of pension contributions into the wage packet) to encourage people not to retire as well as a freeze on retirements for next year.

Not surprisingly, the initial response to the Berlusconi government proposals has been mixed, with both the trade union movement and government coalition partners the Northern League expressing grave reservationstions. It is the League's concerns that may prove a greater obstacle.

Lest anyone failed to get the point, League leader Senator Umberto Bossi pointed out this week that up to 80 per cent of retirement pensions in Italy are paid out to northern Italians - i.e. to much of his electorate.

In an attempt to head off Northern League opposition, Mr Berlusconi has told his Northern League allies that their collaboration on pensions reform will be rewarded with an acceleration of the government's institutional and federal reforms package.

The creation of a regional assembly to replace the Senate and the implementation of wide-ranging regional devolution are the veritable Holy Grail for Mr Bossi. Mr Berlusconi may well take Mr Bossi's concerns seriously. His previous government in 1994 was brought down when the Northern League walked out, partly in opposition to a proposed pensions reform package.