The Italian Public Pension System - Current Prospects and Reform Options

The Italian Public Pension System: Current Prospects
and Reform Options by Patricia Canziani and Dimitri G. Demekas

Public pension expenditure in Italy grew from about 5 percent of GDP in
the early 1960s to over 15 percent in the early 1990s, outpacing all other
categories of primary government expenditure and making Italy one of the
biggest spenders on pensions among industrialized countries. In the future,
the adverse demographic dynamics are expected to increase the pressures on
the pension system. Against this background, a reform of the pension system
was undertaken in 1992, aimed at stabilizing the share of pension spending
in GDP and at reducing the distortions and inequities of the system. This
reform was insufficient to restore the system to equilibrium, and further
reforms are currently being prepared on the basis of an agreement reached
between the Italian government and the trade unions in November 1994.

The paper reviews the current state of, and outlook for, the Italian
public pension system, focusing primarily on its financial aspects. A
pension system has, of course, other important implications, notably for the
labor market, savings, and income distribution; these, however, lie outside
the scope of this study. In view of the impending pension reform in Italy
and the current public debate on this topic, the paper also simulates the
quantitative effects of four possible reform options: lowering the accrual
rate; raising the retirement age for women; introducing an early retirement
penalty; and reducing survivors' benefits. These options do not exhaust the
menu of possible reforms, but any package intended to restore the long-term
equilibrium of the system would have to include at least some of them.

One thing that the simulations underscore is that there is no quick
fix: in all cases, the effects of the measures on pension spending would be
relatively limited in the next three to five years, and in some cases it
would be negligible. However, some of the measures would generate
substantial savings in the long term. The paper therefore suggests that the
ideal package would contain a mix of some measures with immediate impact and
some with a growing effect over time.