Pension expectations, reforms and macroeconomic downturn in Italy. What can microdata tell us?

ABSTRACT

We use different years of the Bank of Italy’s Survey on Household Income and Wealth (SHIW) to explore how Italian workers’ expectations regarding their future level of pension benefits and retirement age changed from 2000 to 2014. Comparing expected and statutory values for future pension benefits and retirement ages, we find that knowledge of the pension system and its rules are not evenly distributed among workers. Some sections of the population, in particular, younger workers, women and the self-employed, are less precise in estimating their future pension benefits. As for retirement age, a large share of the working population still has not completely assimilated the implications of the linkage with the evolution of lifetime expectations at 65. Expectations in the final part of the period observed are dominated by increasing pessimism, which may be related to the macroeconomic crisis of the Italian economy and to the approval of a severe pension reform in 2011. Checking whether a household’s total wealth is consistent with lifetime consumption, we find that households where the head overestimates the future value of the pension benefit accumulate fewer resources than the remaining part of the population.

KEYWORDS:

• Pension expectations
• pension reforms
• information
• saving adequacy

JEL CLASSIFICATION:

• H55
• J28
• D84

Acknowledgements

We wish to thank Tito Boeri, Emanuele Ciani, Angelo Marano, Marcello Morciano, Federica Teppa and Arthur Van Soest and the participants in seminars in Modena, Pavia and Rome for valuable comments on previous versions of the article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Other countries have chosen quite a different path to introduce reforms in the pension system as profound as in the Italian case. The notable example of this is Sweden, where a public debate preceded the approval of the reform and where the government updates the likely evolution of future pension benefits annually (Sunden 2012). The effectiveness of information policies concerning pensions has been discussed by Finseraas and Jakobsson (2014) among others. See also Sunden (2012) for a comparison of policies developed in Sweden and in the United States.

² We describe the procedure to obtain rates of growth in lifetime earnings in Appendix 2.

³ In fact, the lowest replacement rates occurred in 2010 for the statutory rate and in 2012 for the expected rate. In the final period we consider, the replacement rates showed an upward trend because of the higher retirement age. This effect more than balances the negative effect of the progressive phasing-in of the NDC rule among the population.

⁴ Individuals are able to retire under the Italian social security system by two different sets of criteria. They can retire at the legal retirement age or they can retire early if certain conditions regarding age, seniority and the level of the accrued benefit are fulfilled. In the table, an individual is considered as eligible to retire if he/she meets either set of criteria.

⁵ According to the National Statistical Institute’s demographic forecasts, life expectancy at age 65 is predicted to increase by more than three years in the next four decades.

⁶ Mazzaferro and Toso (2009), for example, document the generational difference in favour of adult workers and pensioners in the reduction of the net social security wealth occurring as a consequence of the 1992 and 1995 pension reforms in Italy.

⁷ Skinner (2007) originally proposes a similar approach to the measurement of saving adequacy for US households. Instead of computing a residual measure he determines whether the current saving rate is consistent with the estimated intertemporal budget constraint of Equation (4).

⁸ W was computed as the average of the last 5 years of earnings for the scheme of dependent private workers, 1 year for public employees, 10 years for the self-employed, and revalued to allow for inflation.

⁹ The terms W₁ and W₂ in the MDB formula vary according to the pension scheme. In particular, W₁ is equal to the last year of earnings for employees in the public sector and the average of the last 5 or 10 pensionable yearly earnings for those employed in the private sector and self-employed workers respectively. W₂ is the mean computed over the last 10 years of positive earnings for public and private sector employees and over the last 15 years for self-employed workers.