Lunch seminar: “Political Sustainability of Italian Pension Reforms: Role of Labor Supply and Human Capital Accumulation Decisions”

by Tetyana Dubovyk (CeRP)

06 May, 2008; h: 12:45

Collegio Carlo Alberto


In 1990s, several pension reforms had been adopted to insure financial sustainability of Italian Social Security system. This paper studies three main features of the reforms: (i) adoption of notional defined contributions formula; (ii) price indexation of benefits as compared to wage indexation prior to 1992; (iii) increase in retirement age. As the reforms envision a long phase-in period, I consider the effect of the reforms on different generations and ability groups within generations.

The major focus is on time allocation and human capital accumulation decisions of transition generations. This paper studies household decisions and welfare consequences of the reforms using general equilibrium overlapping generations framework. Agents in the economy allocate their time endowment among leisure, market and human capital accumulation productions. The economic and demographic structure of the economy is calibrated to (i) Italian macroeconomic variables in 1992, (ii) observed earnings profiles in Survey of Household Income and Wealth by Banca d’Italia. Transitional computations are conducted with different scenarios for productivity growth and demographic structure of Italy up to 2050. The reforms have different welfare effects on various generations and ability groups within generations. Within general equilibrium framework, the individual decisions determine macroeconomic performance of the economy and solvency of the new retirement system. Based on welfare analysis, this paper determines the level of political support for the reforms during the transition to new retirement system.