Actuarial fairness when longevity increases: An evaluation of the Italian pension system

In this study, we analyse the actuarial features of the Italian pension system after the 1995 reform. We consider both the old defined benefit, the pro-rata and the new notional defined contribution pension rules applied to private sector employees born between 1945 and 2000. In the computations, we allow for dynamic mortality. To this aim, we project cohort- and gender-specific mortality rates based on a limit demographic scenario recently depicted by demographic experts. We compare findings for the currentlegislation with those from a quasi-actuarially fair scenario, where cohort- and gender-specific mortality rates are taken into account in the pension computation.The old DB rules are extremely generous and offer strong incentives to early retirement. Due to dynamic efficiency, the new NDC scheme provides less than actuarially fair benefits. As a consequence of the rules adopted to compute coefficients used to convert the notionally accumulated sum at retirement into the annuity and to update them in response to increasing longevity, the NDC scheme is more than quasi-actuarially fair. Periodical ex-post adjustments of the coefficients generate big incentives to retire. The main cause for the actuarial unfairness embedded in the new Italian pension system is the use of cross-sectional mortality rates in the computation of conversion coefficients: retired cohorts will likely live longer than what accounted for in the computation of their pension benefits, since cohort effects in mortality are disregarded by the Italian law.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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