Pension system in Italy
Public and mandatory system
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
definitions
Old age pensions are granted to people who have stopped
working b/se of age limits whilst seniority pensions are
granted to those workers who have reached a certain
number of years of contributions.
Disability pensions are intended for people who have been
injured in an accident and are no longer able to carry out
the work that ensured their income.
Pensions for survivors go to those who, even if they have
not been employed, have been linked by family ties to
workers who have died.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Social pensions are for people who have no
means of support, regardless of whether
they have worked or not.
The first two categories of pensions perform
the function of social security / insurance,
while the other two can be considered forms
of welfare (assistance) intervention.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Total expenditure for social protection in Italy
in % of GDP and in % of primary current expenditure
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
A bit of history….
The first social benefits provided in Italy and elsewhere in
Europe were “mutuals” (=mutual protection) created by
specific categories of workers.
With the spread of industry and with the formation of the working
class, the social security system has gradually become
mandatory and managed by public institutions.
Lagging behind the rest of Europe, old age and disability
pensions were introduced for the first time in Italy in 1864,
and used only for state employees.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
A bit of history….
.
In 1919, these institutions became mandatory for private
dependent workers while pensions for the survivors were
introduced only in 1939, in favor of these same workers.
Between the 50's and 60's mandatory retirement has been
extended to all categories of workers (craftsmen, salesman,
trade sector, etc ...) and at the end of the '70s social pensions
were introduced.
Remember from last times: what are the implications on the
budget balance of involving more people into p-a-y-g sytem?
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Remember from last times: what are the implications on the budget
balance of involving more people into p-a-y-g sytem?
Nb * B = t * Nw * w
B = t * (Nw/Nb) * w
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
or
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More history ….
The growth of social spending that was recorded until the end of the '70s
is explained by the gradual extension of the intervention to larger
groups of workers and populations, while the reasons for the growing
deficits that occurred during the 80s and early 90s are due: to the
method of financing of social security institutions, macroeconomic
trends and the changing structure of the population.
This has formed a substantial pension debt, which is, it has become
more and more significant the difference between the present value of
pension benefits that the state has undertaken to pay and the present
value of the social contributions that will be paid to the public budget.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
More history ….
With the primary aim to curb spending, the Italian pension
system has been radically changed with the reforms Amato
(d.lgvo 503/92) and Dini (Law 335/95).
More recently, work on this subject have been made under the
first Prodi government (Art. 59, Law 449/97) the second
Berlusconi government (Law 243/2004)
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Pension systems
classified according to:
1) The method of financing:
a) capitalization / funded;
b) pay as you go.
2) The criteria for the definition of
performance:
a) defined contribution;
b) defined benefits
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
FROM LAST TIME
funded and pay as you go
About the financing arrangements, the revenue of public social security
contributions paid by workers and employers can be used in different ways
depending on whether the funding system is unfunded or funded.
In the PAYG system the tax revenue collected in each period finances pensions
provided during the same period, that is, the working generation pays the
pensions of those who have ceased to work.
In funded systems, contributions from employees are invested in the capital
market and, at retirement, the pension is equal to the contributions paid
increased the rate of return prevailing on the mkt.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Funded and pay as you go
We use an overlapping generations model to understand on which variables are
dependent the two systems.
We assume a society with only two generations: young people ( Nt + 1) born at t+1,
and the elderly (Nt).
Each generation lives only two periods (during the first it works, while the second is
retired).
The population grows at rate n. Young people receive a salary S and pay a
contribution rate c.
Labour productivity grows at a constant rate m, which is reflected entirely on
wages.
The mkt interest rate is r and is constant for the entire period.
The wage bill at the end of period t is: Nt * St
Total contributions at the end of period t is equal to: C*St*Nt
It should be remembered, finally, that (error below: n instead of m!)
St 1  St 1  n  e Nt 1  Nt 1  m
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Pr = Pro capite pension in a pay as you go
Con il sistema a ripartizio ne la pensione pro - capite è la seguente :
Pr 
cSt 1 N t 1
S 1  m N t 1  n 
c t
 cSt 1  m 1  n 
Nt
Nt
Pc= Pro capite pension in a funded
Con il sistema a capitalizz azione è invece :
Pc 
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Harvey S. Rosen, Ted Gayer
cS t N t 1  r 
 cS t 1  r 
Nt
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comparison
From a simple comparison of the two equations which indicate the
pension per capita in the two systems, it can be seen that, for a given
contribution rate c, the two systems are equivalent only if the interest
rate is equal to the sum of the rate of productivity growth and the rate
of employment growth, rounded up to m · n.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Defined benefits and defined contributions
(PAYG)
Pension systems can be distinguished depending on the criteria used to
define pension benefits, which can be calculated by reference either to
the employee's wages or paid contributions.
In the first case, we talk about defined benefits (wage based) system
and wages considered to define the pension may be the one received at
the last period of his working life or an average of what he earned
throughout theirhis working life
Regardless of the method of calculation, the idea behind the first
system is that the state will ensure to retirees a standard of
consumption similar to that enjoyed during the period in which he
worked.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Defined contributions
In the second case, the system is by defined contributions and
public intervention aims to bind individuals to a
compulsory saving ahead of time of inactivity
The rate of return on savings is not the market rate, such as in
funded systems, but is defined by the law beforehand
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Defined contributions and wages
In Italy, until the early '90s, the social security system was one of defined
benefits and characterized not only by a massive pension liabilities, but
also marked by huge differences in treatment between categories of
workers (employees and self-employed) and between sectors of
'economy (industry, agriculture and services).
Also, for a long period of time, it has been made a wrong use of certain
benefits: seniority and disability pensions were used in place of
unemployment benefits to manage downturns in the business cycle and
the evolution of production .
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
From the distribution point of view, the amount of pension costs is such
that the effects on income distribution are certainly comparable to
those produced by the tax system.
In general terms, we can say that all public pension systems are based on
some pact between generations and the most delicate aspect of the
reforms is the fact that this should be redefined and we change the
agreement between the employee and the elderly and the role of the
state as guarantor of this agreement.
Transitional generation!!! See previous lesson!!!
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
In a PAYG DEFINED CONTRIBUTION SYSTEM transfers of
resources between generations are determined by the difference
between the rate of return of contributions that the State guarantees to
pensioners and the performance of financial markets:
if the rate of return of contributions exceeds the market, then is the young
generation which transfers resources to the elderly and vice versa
when the remuneration paid is less than that of the market.
In the PAYG system, the analysis is a bit 'more complex and to
understand the transfer of resources between generations is to be used
a concept of equilibrium tax rate.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
In the PAYG system the equilibrium tax rate is the following:
NtPt = c St+1 · Nt+1
which says current total benefits = to total current revenues
We will develop this equilibrium conditions for the following
possible arrangements between generations:
=> the rate of substitution between salary and pension is fixed;
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Pension is a fixed percentage K of the last salary (replacement ratio)
C is the equilibrium tax rate and by substituting we single it out (last
line)
La pensione è una percentuale k dell' ultima retribuzio ne
Pt  kSt
N t Pt  cS t 1 N t 1 è l' aliquota di equilibrio
sostituend o Pt nella condizione di equilibrio , si ottiene
N t kSt  cS t 1  m N t 1  n 
c
k
è l' aliquota di equilibrio
1  m 1  n 
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
As before, with a fixed rate of substitution pension to wage
P with little t is given and not influenced by changes in m and n!
Therefore if n declines, c must increase(young pay)
if m increases, c can decline (young gain)
S netto  1  c 1  m S t
Pt  kSt e c 
k
con k fisso,
1  m 1  n 
se n scende, c cresce e l' onere è sopportato dai giovani
se m cresce c diminuisce e ne benefician o i giovani.
La pensione degli anziani non è influenzat a dai mutamenti nelle variabili m ed n.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
problems before reforms of the ’90s
The problematic features of the Italian pension system before the reforms of the
90s
•
Extensive use of deniority pensions (the so-called baby pensions).
Improper use of disability pensions.
•
Marked differences (for insured benefits and required contributions)
between categories, sectors, workers and self-employed (the so-called
"contribution jungle ").
•
It was a system payg defined benefit with fixed rate of substitution (the
pension was a fixed proportion of the average wage of the last years of
work).
•
As the rate of population growth and the productivity of today are greatly
reduced compared to the values ​in the '70s, could be kept in balance only by
increasing the contribution rate.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Recall that with such a system, the generational
Pact was formulated as below
Ricordare che con questo sistema di finanziame nto e di patto
tra generazion i era del tipo (il primo che abbiamo considerat o) :
S n  1  c 1  m St
Pt  kSt
c
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Harvey S. Rosen, Ted Gayer
k
1  n 1  m 
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Amato Reform
Main changes
Retirement age increased ( 60 to 65 anni for men, 55 to 60 for women)
(with a minimum of 20 years of contributions for old age pension) 35
years for seniority pensions
Replacement ratio
Indexation only to prices not anymore wages
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Amato defined benefits
The pensionable salary is the average salary for all taxable years in which
the employee has contributed to pension system, referring to the entire
working life, excluding from the average those less than 20%, with a
ceiling (1/5)
In doing this the average wage earned in different years, are harmonised
over time with a calculation that takes into account the compounding
rate of inflation plus 1% for each year.
The new pension arrangements has been applied to those who entered the
labor market in 1994, did not affect those already retired at the time
were only modestly and those who were already in business.
No GRADUALITY!
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Dini Reform defined contribution
Full application to those who entered job mkt in 1996.
For those at 1 January 1996 had already entered the labor market, but have less
than 18 years of contributions will be applied pro-rata system, whereby a part
of the pension is calculated by the fixed benefits some by the fixed
contribution system (therefore often also referred to as the mixed system).
For those ho had more than 18 years of contribution at 3 december 1995
the old system is mantained
GRADUALITY????
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Dini reform
Rate of capitalisation mobile average 5 years nominal GDP
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
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Latest intervention
Harmonising treatment
Increasing retirement age
Increasing number of years of contribution
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
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Gli interventi più recenti
In altre parole, nel 2008 i lavoratori dipendenti sono potuti andare in
pensione con 58 anni di età e 35 di versamenti. Per gli autonomi erano
invece richiesti 59 anni di età. Dal 1 luglio 2009 è invece scattato un
meccanismo di quote, con il quale si terrà conto della somma dell’età
anagrafica e degli anni di versamenti, ancorato a un’età minima e ai 35
anni di contributi.
Per esempio, per i lavoratori dipendenti, si partirà con quota 95, con
almeno 59 anni di età: ciò significa che potranno andare in pensione
coloro che avranno 59 anni di età e 36 di contributi (36 + 59 = 95),
oppure 60 anni di età e 35 di contributi e così via. Tale quota aumenterà
a 96 dal 1 gennaio 2011 e di un altro punto fino al 2013.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Test your
Macrosostenibility new system after Dini by using the formula
Pro capite pension in a pay as you go system
Derive/veryfy/check/explain:
• pro- capite pension and pension expenditure increase with GDP
• contrary to the fixed benefits system, financing disequilibria cannot be
corrected by increasing the tax rate: why?
• being a pay as you go system still subject to demographic changes:
explain.
Scienza delle finanze 3/ed
Harvey S. Rosen, Ted Gayer
Copyright © 2010- The McGraw-Hill Companies srl
Replacement rates per
gender
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Harvey S. Rosen, Ted Gayer
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