Social Security Incentives For Retirement In Italy

Abstract

The present work is the first of a two-paper project aiming at bringing a new empirical contribution to literature on retirement, with particular focus on Italy. In this paper I carry out an analysis of Social Security-provided incentives for early retirement and of the main changes brought about by the two major early 90s reforms. For this purpose I use a sample of male employees drawn from the Bank of Italy Survey on Wealth and Income of Italian Households (SHIW) and I calculate both static and dynamic SS incentive measures: as for the latter, I discriminate between one year and lifetime measures of the accumulation opportunities of SS entitlements and suggest new measures to account for the trade-off comprised in the decision of retirement. The analysis documents strong early retirement incentives for Public Sector employees and relevant binding eligibility constraints for Private Sector workers. In general prosecution of work beyond age 60 has been dramatically discouraged due to the actuarial unfairness of pension formula. As for the effects of the SS reforms, it emerges that the early 1990s changes will produce a strong cut of benefits in the long run, while for current employees the most important changes have been the reduction of benefit indexation, the temporary restrictions and actuarial penalizations on seniority retirement. It turns out that especially Public Sector employees and younger cohorts undergo the strongest benefit cuts. All in all, to the extent to which such benefit cuts have been perceived by individuals, one would expect reforms to have induced anticipated exits from labor force among older cohorts.