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

47 Pages Posted: 20 Aug 2002

See all articles by Marcello D'Amato

Marcello D'Amato

University of Salerno - Centre for Studies in Economics and Finance (CSEF)

Vincenzo Galasso

University of Lugano; Centre for Economic Policy Research (CEPR)

Date Written: June 2002

Abstract

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.

Keywords: Political equilibria, demographic dynamics, defined benefits

JEL Classification: D72, E17, H55

Suggested Citation

D'Amato, Marcello and Galasso, Vincenzo, Assessing the Political Sustainability of Parametric Social Security Reforms: The Case of Italy (June 2002). CEPR Discussion Paper No. 3439. Available at SSRN: https://ssrn.com/abstract=324961

Marcello D'Amato (Contact Author)

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy
+39 089 962074 (Phone)
+39 089 962339 (Fax)

Vincenzo Galasso

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, 6900
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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