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Assessing the Political Sustainability of Parametric Social Security Reforms: the Case of Italy

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  • Marcello D’Amato

    () (University of Salerno)

  • Vincenzo Galasso

    () (Bocconi University, I.E.P.)

Abstract

Recent reforms of the Italian social security system (Amato-Dini reforms) aimed at reversing the upward trend in Government pension spending. The main provisions of these reforms are: i) the adoption of a (unfunded) defined contribution system as a basis for computing pensions benefits, ii) a sharp reduction in the incentives to retire early, iii) an increase in the statutory retirement age, and iv) the indexation of pensions to price inflation rather than to wage growth. This paper evaluates the long run political sustainability of this new pension system. We use a general equilibrium model calibrated to reproduce the main Italian demographic, economic and political aspects as well as the social security system before and after the reforms. We simulate our model to compute the equilibrium tax rate that is preferred by a majority of voters at steady state, i.e., in the year 2050, given the structural characteristics of the Italian economy and for different retirement ages. To evaluate the effectiveness of the reforms, we compare the equilibrium tax rate under the new regime with the equilibrium tax rate that would have prevailed in absence of reforms. Two main aspects of the aging process are relevant to our analysis: i) the increase in the dependency ratio, which reduces the profitability of the (unfunded) social security system and ii) the increased political influence of the elderly voters. Our simulation suggest that, to retain its political sustainability under the Amato-Dini regime, the equilibrium social security tax rate has to increase from 38% in 1992 to 48.9% in 2050. At steady state, the most effective provision of the reform in reducing pension spending is an increase in the retirement age. The switch to a (unfunded) defined contribution system has mainly redistributive implications, while eliminating the indexation of pension benefits to wage growth induces a majority of voters to increase the replacement rate at retirement.

Suggested Citation

  • Marcello D’Amato & Vincenzo Galasso, 2002. "Assessing the Political Sustainability of Parametric Social Security Reforms: the Case of Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 61(2), pages 171-213, December.
  • Handle: RePEc:gde:journl:gde_v61_n2_p171-213
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    References listed on IDEAS

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    1. Sandro Gronchi, 1998. "La sostenibilità delle nuove forme previdenziali ovvero il sistema pensionistico tra riforme fatte e da fare," Economia politica, Società editrice il Mulino, issue 2, pages 295-316.
    2. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February.
    3. Onorato Castellino & Elsa Fornero, 1999. "From PAYG to Funding in Italy: A Feasible Transition?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 24(4), pages 473-487, October.
    4. Daniele Franco, 2002. "Italy: A Never-Ending Pension Reform," NBER Chapters,in: Social Security Pension Reform in Europe, pages 211-262 National Bureau of Economic Research, Inc.
    5. Galasso, Vincenzo, 2000. "The US Social Security: A Financial Appraisal For The Median Voter," CEPR Discussion Papers 2456, C.E.P.R. Discussion Papers.
    6. Felice Roberto Pizzuti, 1998. "Pension Reform and Economic Policy Constraints in Italy," LABOUR, CEIS, vol. 12(1), pages 45-66, March.
    7. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-388, September.
    8. BOLDRIN, Michele & RUSTICHINI, Aldo, 1994. "Equilibria with Social Security," CORE Discussion Papers 1994060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Castellino, Onorato, 1995. "Redistribution between and within generations in the Italian social security system," Ricerche Economiche, Elsevier, vol. 49(4), pages 317-327, December.
    10. Vincenzo Galasso, 1999. "The US Social Security System: What Does Political Sustainability Imply?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 698-730, July.
    11. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
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    Cited by:

    1. Vincenzo Galasso & Paola Profeta, 2004. "Lessons for an ageing society: the political sustainability of social security systems," Economic Policy, CEPR;CES;MSH, vol. 19(38), pages 63-115, April.
    2. Raquel Fonseca & Thepthida Sopraseuth, 2005. "Welfare Effects of Social Security Reforms Across Europe : the Case of France and Italy," CSEF Working Papers 138, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Raquel Fonseca Benito & Thepthida Sopraseuth, 2007. "Welfare Effects of Social Security Reforms Across Europe The Case of France and Italy," Working Papers WR-437, RAND Corporation.
    4. Scopelliti, Alessandro Diego, 2009. "Current Features and Future Problems of the Italian Pension System," MPRA Paper 20077, University Library of Munich, Germany.
    5. Brugiavini, Agar & Galasso, Vincenzo, 2004. "The social security reform process in Italy: where do we stand?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(02), pages 165-195, July.

    More about this item

    Keywords

    political equilibria; demographic dynamics; defined benefits;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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