Actuarial Fairness in Pension Systems: An Empirical Evaluation for Italy Using an OLG Model

Michele Belloni () and Magdalena Zachlod-Jelec
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Michele Belloni: University of Turin, Department of Economics and Statistics “Cognetti de Martiis”
Magdalena Zachlod-Jelec: European Commission Joint Research Centre

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2022, pp 83-89 from Springer

Abstract: Abstract The Italian pension system underwent two major reforms, in 1995 and 2011, encompassing a long transitional phase from defined benefit to notional defined contribution (NDC) rules. Automatic adjustments of benefits and eligibility age, in reaction to changes in life expectancy, were introduced to reduce political risk. In this paper, we evaluate the actuarial features of the Italian pension system using an overlapping generation (OLG) model that accounts for interdependencies between the macroeconomy, the labor market, and the pension system. This is in contrast to existing studies for Italy that use microsimulation or representative agent models. In addition to that, we evaluate two policy changes concerning the computation and adjustment of conversion coefficients used in the NDC formula. Namely, we consider the calculation of cohort-specific conversion coefficients. The first policy change exploits Eurostat projected life tables, whereas the second relies on historical mortality rates attributed to retiring cohorts following the computational mechanism existing in Sweden. The NDC system returns individuals 60% of what they paid as contributions during their working life. This value is lower than what was found by previous studies and is the result of dynamic efficiency as endogenously determined by the OLG model. Projected cohort-specific conversion coefficients lead to a slightly lower generosity, accounting for the reduction in mortality probabilities individuals experience after retirement. By implementing a narrow retirement age window, Swedish-type conversion coefficients do not suffer from obsolescence. Significantly, vis-à-vis the current legislation, they do not alter pension generosity and, as such, they look politically appealing.

Keywords: Actuarial fairness; Overlapping generation model; Notional defined contribution (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-99638-3_14

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DOI: 10.1007/978-3-030-99638-3_14

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