Demographic transitions and social security: The case of Italy
Most developed countries face increasing challenges to the sustainability of their public pension systems, which were created in an era when the life expectancy of retirees was much shorter than today. In Italy, these challenges are exacerbated by additional factors: Very low birth rates, little immigration and a historically generous public pension system.
In this dissertation, the factors affecting future sustainability of the Italian Pay-As-You-Go (PAYG) system are systematically analyzed. First, the development of the population over the next 75 years is studied. The effects of (changes in) mortality coefficients, fertility rates and immigration levels on the population’s size and age distribution are determined stochastically, with a computer program that was specifically developed for this purpose. A unique feature of these calculations is that a distinction is made between the fertility of native Italian and first-generation immigrant women. The latter is much higher, which causes substantial differences when extrapolated over 75 years. It turns out that all reasonable models predict a sharp increase in the dependency ratio, with a peak around 2040 followed by a slow decline.
A second computer program uses the predicted population composition as input and calculates the consequences for the PAYG system. This program was designed to study the effects of specific changes in the system's rules, changes regarding the official retirement age, contribution levels, the relationship between pension levels and life expectancy, etc. It turns out that, even after the 1995 reforms, which intended to improve long-term sustainability, public pension expenditures would rise from their current level (~14% of GDP, highest among European countries) to well above 20% of GDP by the middle of the century. It is shown that additional modifications, in particular gradual adaptation of pension levels to the retirees’ remaining life expectancy, may restore sustainability once the population has regained a stable composition. However, because of the current distorted age distribution (cohorts born between 1945 and 1980 being on average 48% more populous than cohorts born after 1980), the pension crisis that looms for the period 2030-2050 calls for major increases in the participation of especially women and elderly (>55) workers.