Early Announcement of a Public Pension Reform in Italy: Working Paper 2006-01

Working Paper
January 1, 2006

Maria I. Marika Santoro

There has been much discussion about the need for public pension reforms in most of the Organization for Economic Cooperation and Development (OECD) countries, but what is the macroeconomic impact of announcing reforms in advance? The Italian pension system reform in 1992 represents an illustrative case to address this question. The Italian government announced the pension system reform with the aim of slowing the growth of the system’s expenditures by raising the eligibility retirement age. The present paper develops an overlapping generations (OLG) model, with endogenous retirement, in order to analyze the impact of this pre-announced reform on the agents’ retirement decision and pensions’ expenditure. We calibrate the model to Italian data in 1992 and then we simulate the announcement of a five-period increase in the eligibility age for retirement. The delay between the announcement of the reform and its enactment creates the possibility for eligible individuals to decide whether to retire immediately or keep working under the new public pension system. The model shows that the transition to the new pension system would be characterized by a drop in the employment rate of workers ages 55 and older and explains 77 percent of the actual drop. The model also predicts an 8.25 percent increase in pensions’ expenditure, and explains 83 percent of the actual increase. Finally, the welfare analysis highlights a loss for almost all the transitional generations because of the specific structure of the Italian reform and its early announcement.