Survival inequalities and redistribution in the Italian pension system

Abstract

The public pension system in Italy is a defined contribution scheme based on the principle of actuarial fairness. The pension annuity is calculated starting from capitalised value and the Legislated Conversion Factors (LCFs) for each retirement age. The demographic parameters used by legislators in computing the LCFs are the survival probabilities of an average Italian, irrespective of gender or any characteristic except age. The aim of this paper is to analyse the impact of the differences in survival between men and women, and between individuals with different educational levels, on the calculation of the pension annuity, starting from the specific Conversion Factors (CFs). The gap between the LCFs and the factors obtained by allowing for differential survival across gender and socio-demographic groups (CFs) gives us a means of making a quantitative assessment of the implicit redistributive impacts of the annuity redistribution from individuals with a lower life expectancy to individuals with a higher life expectancy. 1 Italian pension reform: an introduction Since the mid-1970s, the demographic behaviour of Italians has undergone profound changes that have modified the population dynamics of the country both directly and indirectly, and have thus had significant consequences for various aspects of social and economic life in Italy. The slow but inexorable shift in the demographic profile of Italy has been caused by declining fertility on the one hand, and increasing survival on the other. It is generally understood that when the ∗ Graziella Caselli (corresponding author), Sapienza University of Rome, Department of Statistical Sciences, Viale Regina Elena 295, 00161, Rome, Italy Email: graziella.caselli@uniroma1.it Rosa Maria Lipsi, Italian National Institute of Statistics (ISTAT), Italy The views and opinions expressed in this paper are solely those of the author and do not necessarily reflect those of the Italian National Institute of Statistics (ISTAT). DOI: 10.1553/populationyearbookXXXX 2 Survival inequalities and redistribution in the Italian pension system younger cohorts are constantly shrinking even as the older cohorts are expanding, the population will age. In 2016, Italy and Germany were the European countries with the highest shares of the population aged 65 or older: 21.9 per cent for Italy and 21.2 per cent for Germany. This figure for Italy seems even more significant if we consider that it represents a population of almost 14 million, up from four million in 1951 (eight per cent of the total population). Although demographers had been issuing detailed warnings of this demographic shift since the late 1970s (Vitali 1976; Golini and Pinnelli 1983; Golini 1987), politicians were slow to realise that given the speed at which the ageing process was advancing, this shift would have an unprecedented impact on the country’s public expenditures starting around the turn of the century. It was especially difficult to persuade politicians to pay attention to pension expenditures in the years when the combined effects of the growth of the population of working ages (due to the postwar baby boom that continued into the early 1960s) and high employment levels were pouring an unprecedented surplus into the coffers of the pension system. For many years, the retirement age and the pay-as-you-go system were not a problem – indeed, the revenue generated by this system could easily cover expenditures on welfare as well. When the first worrying signs of a rapid increase in pension expenditures began to appear in the 1990s, there was still no sense of urgency among policy-makers. While some minor adjustments to the retirement system were made, more drastic interventions would be required in the future. At that time, the retirement age was raised, early retirement pensions were scaled back (early retirement was still possible for workers with 35 years of contributions, and as little as 20 in the public sector), and years of contributions were tied more closely to pension size. From 1995 onwards, a new method of calculating pension benefits – a “contribution system” that we describe in detail in this paper – was phased in (with the “1995 Dini reform”: Law of 8 August 1995, No. 335 (Table A.1, Appendix)). This system will go into full effect in 2030-35, when the baby boom generations born in the 1960s will have left the work force and become pensioners themselves. It is becoming increasingly clear that the implementation of this reform has been too gradual. While additional legislative measures aimed at reforming the retirement system were approved in 2011, pension expenditures have continued to grow at an unsustainable rate, triggering the need for a further series of pension reforms (Figure 1). Law Decree No. 201/2011 (known as the 2011 “salva Italia” decree), which included the “2011 Fornero reform” (Table A.1, Appendix), made two important changes to the retirement system. The decree brought the implementation of the “1995 Dini reform” forward many years by introducing a pro-rata contribution system for all workers starting on 1 January 2012. The legislation also raised the minimum retirement age to 66 for men; and from age 60 to age 62 for employed women, followed by a phase-in period to age 66 by 2018 (64 in 2014, 65 in 2016, and 66 in 2018). The minimum retirement age for self-employed women was set one year higher (65 in 2014, 66 in 2016, and 67 in 2018). The law also introduced a flexible retirement band that allows individuals who choose to work beyond the Graziella Caselli and Rosa Maria Lipsi 3 Figure 1: Italian pension expenditures as a percentage of gross domestic product (GDP) from 1990 to 2014 12 13 14 15 16 17 18 199