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

  • D'Amato, Marcello
  • Galasso, Vincenzo

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3439.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3439
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  1. 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.
  2. 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.
  3. 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 373-88, September.
  4. 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.
  5. Castellino, Onorato, 1995. "Redistribution between and within generations in the Italian social security system," Ricerche Economiche, Elsevier, vol. 49(4), pages 317-327, December.
  6. BOLDRIN, Michele & RUSTICHINI, Aldo, 1994. "Equilibria with Social Security," CORE Discussion Papers 1994060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Felice Roberto Pizzuti, 1998. "Pension Reform and Economic Policy Constraints in Italy," LABOUR, CEIS, vol. 12(1), pages 45-66, 03.
  8. Galasso, Vincenzo, 2000. "The US Social Security: A Financial Appraisal For The Median Voter," CEPR Discussion Papers 2456, C.E.P.R. Discussion Papers.
  9. Gronchi Sandro, 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.
  10. 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.
  11. 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, vol. 24(4), pages 473-487, October.
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