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

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  • Galasso, Vincenzo
  • D'Amato, Marcello

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 suggests 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.

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  • Galasso, Vincenzo & D'Amato, Marcello, 2002. "Assessing the Political Sustainability of Parametric Social Security Reforms: The Case of Italy," CEPR Discussion Papers 3439, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3439
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    Cited by:

    1. EL-HOUJJAJI, Hind & ECHAOUI, Abdellah, 2020. "Assessing the financial sustainability of parametric pension system reforms: The case of Morocco," MPRA Paper 98912, University Library of Munich, Germany.
    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. Besmira Lahi, 2016. "Should Overqualification among Employees be Addressed?," European Journal of Multidisciplinary Studies Articles, Revistia Research and Publishing, vol. 1, September.
    4. Vincenzo Galasso & Paola Profeta, 2004. "Lessons for an ageing society: the political sustainability of social security systems [‘Assessing dynamic efficiency: theory and evidence’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 19(38), pages 64-115.
    5. Uebelmesser Silke, 2004. "Political Feasibility of Pension Reforms," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-24, September.
    6. 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.
    7. Scopelliti, Alessandro Diego, 2009. "Current Features and Future Problems of the Italian Pension System," MPRA Paper 20077, University Library of Munich, Germany.
    8. 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(2), pages 165-195, July.

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    More about this item

    Keywords

    Political equilibria; Demographic dynamics; Defined benefits;
    All these keywords.

    JEL classification:

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

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