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Is the Italian NDC pension system really sustainable?Parameters’ design and consistency

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  • Carlo Mazzaferro

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Abstract

Using a multiperiod OLG model we study the theoretical financial, adequacy and distributive characteristics of various NDC systems. The main aim of the paper is to compare the Italian current setting of policy parameters with choices made in other countries that adopted a similar philosophy for the accrual of pension benefits. All countries studied present solutions that are inferior both from a financial point of view and from a distributive one, with respect to a “well designed” system. Among them the Italian NDC system is the one that produces the highest financial imbalance in the long run. Moreover it also relinquished to use the indexation rate of pension benefits, one of the policy parameters that can be used to adjust the pension expenditure dynamics and to correct intergenerational inequities. Looking at situation that are out of the steady state solution of the model it appears that an NDC system, as all PAYGO arrangements, produces complex path of expenditure, where even simple and temporary demographic and economic shocks request decades in order to be absorbed. All these results call for a quick intervention in order to make the system more transparent and more suited to face the real evolution of macro variables, without compromising its financial short and medium term position.

Suggested Citation

  • Carlo Mazzaferro, 2018. "Is the Italian NDC pension system really sustainable?Parameters’ design and consistency," Center for the Analysis of Public Policies (CAPP) 0164, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
  • Handle: RePEc:mod:cappmo:0164
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    References listed on IDEAS

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    1. Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters,in: Social Security Policy in a Changing Environment, pages 43-68 National Bureau of Economic Research, Inc.
    2. Robalino, David A. & Bodor, András, 2009. "On the financial sustainability of earnings-related pension schemes with ‘pay-as-you-go’ financing and the role of government-indexed bonds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(02), pages 153-187, April.
    3. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 16-27, February.
    4. Michal Andrle & Shafik Hebous & Alvar Kangur & Mehdi Raissi, 2018. "Italy: Toward a Growth-Friendly Fiscal Reform," IMF Working Papers 18/59, International Monetary Fund.
    5. Sandro Gronchi & Sergio Nisticò, 2008. "Theoretical Foundations Of Pay-As-You-Go Defined-Contribution Pension Schemes," Metroeconomica, Wiley Blackwell, vol. 59(2), pages 131-159, May.
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    More about this item

    Keywords

    NDC pension system; PAYGO arrangement; sustainability; consistency;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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