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The macroeconomics of pension reform: The case of severance pay reform in Italy

  • Sergio Cesaratto

    ()

    (University of Siena, Italy)

In the last two decades Italy implemented a number of reforms of the public pay-as-you-go (PAYG) scheme that curtailed future pensions. Governments therefore felt the need to increase the number of workers contributing to fully funded (FF) schemes to offset the expected fall in public pensions. In the private sector an existing saving fund, the severance pay scheme (Trattamento di fine rapporto or TFR) was used to expand the anaemic existing FF pillar. The macroeconomic content of the reform seems fragile since the economy’s amount of precautionary saving has not changed. The question is why a bolder reform aiming at creating an additional new old-age saving scheme has not been attempted by the Italian Government. The answer presumably has to do with troubles surrounding the macroeconomics of pension reforms, in particular the difficulties of setting up a FF scheme from scratch or by diverting resources from an existing PAYG program. Not surprisingly, no reform was attempted in the public sector where the TFR works on a PAYG basis. An ancillary argument to defend the reform relies on presumed higher returns from private pension funds (PFs) compared to the old TFR. In this light, the paper examines the non-exiting financial performance of the PFs. The instability of financial markets, even before the current crises, and the fondness of workers for the old TFR are finally used to explain the low popularity of the reform. All in all, the reform seems to be more in the nature of political window-dressing, consisting in a change in management of an existing saving fund, in order to show that something has been done to preserve the future standard of living of retirees.

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Article provided by Edward Elgar Publishing in its journal Intervention. European Journal of Economics and Economic Policies.

Volume (Year): 8 (2011)
Issue (Month): 1 ()
Pages: 69-89

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Handle: RePEc:elg:ejeepi:v:8:y:2011:i:1:p69-89
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  1. Nicholas Barr, 2006. "Pensions: overview of the issues," LSE Research Online Documents on Economics 2631, London School of Economics and Political Science, LSE Library.
  2. Sergio Cesaratto, 2005. "Pension Reform and Economic Theory," Books, Edward Elgar Publishing, number 2081.
  3. Nicholas Barr & Peter Diamond, 2006. "The Economics of Pensions," Oxford Review of Economic Policy, Oxford University Press, vol. 22(1), pages 15-39, Spring.
  4. Sergio Cesaratto, 2007. "Are PAYG and FF Pension Schemes Equivalent Systems? Macroeconomic Considerations in the Light of Alternative Economic Theories," Review of Political Economy, Taylor & Francis Journals, vol. 19(4), pages 449-473.
  5. Philip Agulnik & Julian Le Grand, 1998. "Tax relief and partnership pensions," LSE Research Online Documents on Economics 4652, London School of Economics and Political Science, LSE Library.
  6. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720, Junio.
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  9. Julian Le Grand & Philip Agulnik, 1998. "Tax relief and partnership pensions," LSE Research Online Documents on Economics 51408, London School of Economics and Political Science, LSE Library.
  10. Nicholas Barr, 2006. "(UBS Pensions Series 040) Pensions: Overview of Issues," FMG Discussion Papers dp562, Financial Markets Group.
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  13. Peter Diamond & Nicholas Barr, 2006. "(UBS Pensions Series 041) The Economics of Pensions," FMG Discussion Papers dp563, Financial Markets Group.
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