social security wealth in italy: twenty years of pension reforms michele belloni agar brugiavini...

Social security wealth in Italy: twenty years of pension reforms

Michele BelloniAgar Brugiavini

Elena Raluca BuiaGiacomo Pasini

“The Bank of Italy’s Analysis of Household Finances”Fifty Years of The Survey on Household Income and Wealth and the Financial Accounts, Bank of

Italy, Rome, 3-4 December 2015

Motivation

The Italian pension system has seen a season of reforms in the last twenty years, starting in 1992 (Amato reform), in 1995 (Dini Reform) and finally in 2011 (Monti-Fornero Reform)

The main driver has been financial sustainability of the system, but other important changes have taken place in the Italian society and Italian economy

Survival probability for 60+, men

Source; Brugiavini, Peracchi 2014

Survival probability 60+, women


LFP rate of men, ages 55-59, 60-64, 65-69

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

LFP_5559_M MARSS_LFP5559_M LFP_6064_MMARSS_LFP_6064_M LFP_6569_M MARSS_LFP_6569_M

Source; Brugiavini, Pasini, Weber 2015

LFP rate of women - ages 55-59, 60-64, 65-69

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20140%

10%

20%

30%

40%

50%

60%

70%

80%

90%

LFP_5559_W MARSS_LFP_5559_W LFP_6064_WMARSS_LFP_6064_W LFP_6569_W MARSS_LFP_6569_W


Employment by age, men

Employment by age, women

Employment and life expectancy, men

Note: In 1977 a life expectancy of 32 corresponds to approx. age 42 while a life expectancy of 19 corresponds to age 57 and they correspond to a mortality of 0.003 and 0.015 respectively

32 19

Employment and life expectancy, women

Note: In 1977 a life expectancy of 30 corresponds to approx. age 49 while a life expectancy of 16 corresponds to age 66 and they correspond to a mortality of 0.003 and 0.015 respectively

Social Security In Brief1969 to 1992• Earnings related

• Replacement rate = (2% * number of years of contribution) up to a max of 80%

• Legal retirement age 60 (men) 55 (women)

• Can retire any age if 35 years contributions completed, with no actuarial penalty

Social Security Reforms1992 • “Amato” Reform

Benefits less generousLegal (old age) retirement age gradually reaching 65 (men) 60 (women)

1995• “Dini” Reform

Notionally defined contribution pension benefitsWindow of retirement ages (57-65) with actuarial penalty To become fully operational after 2030 (Grandfathering)

Eligibility for old age pension – private sector employees

Defined benefit Defined contribution

year men Age

women Age seniority men

Age women

Age Contributions

1990 60 55 15 - - - 1991 60 55 15 - - - 1992 60 55 15 - - - 1993 60 55 16 - - - 1994 61 56 16 - - - 1995 61 56 17 - - - 1996 62 57 17 57-65 57-65 5 1997 63 58 18 57-65 57-65 5 1998 63 58 18 57-65 57-65 5 1999 64 59 19 57-65 57-65 5 2000 65 60 19 57-65 57-65 5 2001 65 60 20 57-65 57-65 5 2002 65 60 20 57-65 57-65 5 2003 65 60 20 57-65 57-65 5 2004 65 60 20 57-65 57-65 5 2005 65 60 20 57-65 57-65 5 2006 65 60 20 57-65 57-65 5 2007 65 60 20 57-65 57-65 5

2008-2011 same as above same as above

Year Private employee

Age + Contributive years Contributive years1974 - 35

.. .. ..1994 - 351995 - 351996 52+35 361997 52+35 361998 54+35 361999 55+35 372000 55+35 372001 56+35 372002 57+35 372003 57+35 372004 57+35 382005 57+35 382006 57+35 392007 57+35 392008 58+35 402009 58+35 402010 59+36 402011 60+36 40

Eligibility for early retirement pension

Monti-Fornero Reform (February 2012)

• Relate the retirement age to life expectancy (hence progressive increase in the retirement age)

• Transition to the contributive system (pro-rata) for the calculation of pension benefits

• Two possibilities: – Old age pension– Anticipated pension

Old Age Pension: Post-2012 Eligibility Requirements

Early Retirement Pension: Post-2012 Eligibility Requirements

Earliest age at which Soc Sec Benefits become available

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

201450

52

54

56

58

60

62

64

66

68

Early ret old age men old age women


Aim of this paper

• Compute a summary measure of pension entitlements known as SSW= social security wealth

• Compare SSW for different groups in the population and explore the effect of pension reforms

• Look at dynamic financial incentives (Option value) of work versus retirement

Data

• We make use of several data sets, but two main ones:

• SHIW from 1989 to 2012, approximately XX observations – all ages

• SHARE (Survey of Health Ageing and Retirement in Europe for the Italian sub-sample) approximately 9000 observations, only 50+

Do workers know about pension reforms?SHIW-Expected retirement age

5556

5758

5960

6162

6364

6566

Mea

n ex

pect

ed re

tirem

ent a

ge

1990 1995 2000 2005 2010Year

1940-1949 1950-1959 1960-1969 1970-1979

Men Women

5556

5758

5960

6162

6364

6566

Mea

n ex

pect

ed re

tirem

ent a

ge

1990 1995 2000 2005 2010Year

1940-1949 1950-1959 1960-1969 1970-1979

How retirement age evolved

5657

5859

6061

Mea

n ef

fect

ive

retir

emen

t age

1980 1990 2000 2010Year

Men Women

SHIW data, only retired individuals

Social Security Wealth SSW

• SSW is the present discounted value of the future benefit stream at a given age, conditional upon survival at future ages and eligibility– The institutional set up is «frozen» at the current

age/year– At each new age the individual updates her/his

information on earnings and on legislation– Need a «future» earnings stream, survival

probabilities and current rules for future eligibility

Estimates of Earnings Profiles (INPS data)

SSW as from age 55 for different retirement ages (SHARE- men)

5000

010

0000

1500

0020

0000

2500

00

SS

W

1985 1990 1995 2000 2005 2010Year

age 58 age 60 age 65 age70

SSW at age 55 by cohort, old age, men (SHARE left panel - SHIW right panel)

SSW at age 55 by cohort, early retirement, men (SHARE left panel - SHIW right panel)

OLS of SSW/10000

Age 1.485*** 1.502*** 1.477** 1.489**Age square -0.011*** -0.011*** -0.011** -0.011**Female -1.783*** -1.778*** -0.692** -0.692**1930-1939 -1.987*** -1.954*** -2.181** -2.150**1950-1959 -0.443* -0.456* -0.357 -0.365*1960-1969 -3.501*** -3.555*** -2.946** -2.982**Bef. 19921992-1995 0.205 0.202 -0.233 -0.2341996-2011 -0.438 -0.487* -0.854** -0.888**After 2011 -4.760*** -4.780*** -5.532** -5.543**White_collar -0.314* -0.567*** 0.298* 0.118Education -1.247*** 0.313**North 1.211*** 1.216*** 0.743** 0.750**South -1.891*** -1.867*** -0.954** -0.938**less_th_HS 0.373** -0.892**College -2.469*** -0.503**Etalav -0.574** -0.570**const -29.160*** -31.361*** -21.789** -21.039**R-squared 0.49 0.49 0.51 0.51OBS 11526 11526 11168 11168

Determinants of SSW - SHIW

Advantages of using the SHARE Data

• If one wants to look at the dynamics needs panel data (long panel)

• Other factors beyond financial incentives could determine the retirement decision (Health)

• Issue of how to measure financial incentives

Dynamic Models

Where t = current age (or time) , β = inter-temporal discount factor, ϒ =parameter of risk aversion. π = survival at time s conditional on being alive at time t. k is also a leisure parameter

Mean OV for men (left) and women (right) – Cohort 1945-1949(SHARE)


Pathways to retirement

• Reforms of last 20 years progressively reduced incentives/possibility to retire early

• Disability is a potential pathway out of the labour force. Historically the case in Nordic countries, less in Italy

• OV analysis: – from age 63 onwards, men should be indifferent among

pathways– Form age 58 women indifferent between old age and

disability

Testing health effects

• Not all 63 yo men and 58 yo women are eligible for old age / early retirement

• OV: no incentive to delay retirement, if disability available

• Conditional on OV & age, worse health should lead to take up disability benefits

• We can test this implication

Modelling Retirement decisions

• Simple regression model

• Dependent variable: transition into retirement

• Explanatory variables: OV inclusive, health in a given year, quadratic polynomial in age or age dummies, gender, marital status, education level.

• We report probit estimates for different specifications (using a continous health index and health quintiles).

Health index: PCA 1 componentQuestion Comp1

Difficulty lift/carry 0,2897

Difficulty push/pull 0,2864

Difficulty stoop/kneel 0,2838

Difficulty walking 0,2825

Difficulty climbing stairs 0,2799

Difficulty getting up from chair 0,2699

Difficulty with an ADL 0,2694

Self-reported health (fair or poor) 0,2566

Difficulty reach/extend arms 0,2406

Doctor visit (number) 0,2042

Difficulty sitting two hours 0,2012

Ever experience arthritis 0,1952

Difficulty pick up a dime 0,1871

Back problems 0,1836


Probability of exiting in a given year

Y= Retire in a given year

OV/100.000 -0.037** -0.038** -0.047** -0.049**Hquint_2 -0.011 -0.011 -0.010 -0.008Hquint_3 -0.004 -0.003 -0.003 -0.001Hquint_4 -0.004 -0.002 -0.004 -0.002Hquint_5 -0.021** -0.020** -0.025** -0.023**Age 0.123*** 0.122***Age squared -0.001*** -0.001***Female 0.004 0.008Married -0.005 -0.007Occupation: high skill -0.002 -0.004Occupation: low skill 0.004 0.006High School 0.008 0.009> High School 0.003 0.009

Age dummies No No Yes YesN0bs 2,302 2,302 2,009 2,009Pseudo-R2 0.112 0.114 0.112 0.114

• Financial incentives and eligibility (age) are the key drivers• Good health leads to postpone retirement• Italians do not seem to take advantage of exits through disability: no role for bad health

social security wealth in italy: twenty years of pension reforms michele belloni agar brugiavini...

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