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Funding a PAYG pension system: the case of Italy

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  • Lorenzo Forni
  • Raffaela Giordano

Abstract

Italy is characterised by a mature pay-as-you-go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer-provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy"s Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.

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Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 22 (2001)
Issue (Month): 4 (December)
Pages: 487-526.

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Handle: RePEc:ifs:fistud:v:22:y:2001:i:4:p:487-526.

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  1. Castellino Onorato & Fornero Elsa, 1997. "Privatizzare la previdenza sociale? Condizioni, modalità e limiti," Politica economica, Società editrice il Mulino, issue 1, pages 3-26.
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  5. Martin Feldstein, 1997. "Transition to a Fully Funded Pension System: Five Economic Issues," NBER Working Papers 6149, National Bureau of Economic Research, Inc.
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  7. Kotlikoff, Laurence, 1996. "Privatizing School Security at Home and Abroad," American Economic Review, American Economic Association, vol. 86(2), pages 368-72, May.
  8. Franco, D. & Gokhale, J. & Guiso, L. & Kotlikoff, L.J. & Sartor, N., 1992. "Generational Accounting : The Case of Italy," Papers 171, Banca Italia - Servizio di Studi.
  9. Modigliani, Franco. & Ceprini, Marialuisa E. A. & Muralidhar, Arun Sundarram., 1999. "An MIT solution to the social security crisis," Working papers WP 4051-99., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  12. Agar Brugiavini, 1997. "Social Security and Retirement in Italy," NBER Working Papers 6155, National Bureau of Economic Research, Inc.
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