1. Social security wealth in Italy: twenty years of pension reforms Michele Belloni Agar Brugiavini Elena Raluca Buia Giacomo 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

2. 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

3. Survival probability for 60+, men Source; Brugiavini, Peracchi 2014

4. Survival probability 60+, women Source; Brugiavini, Peracchi 2014

5. LFP rate of men, ages 55-59, 60-64, 65-69 Source; Brugiavini, Pasini, Weber 2015

6. LFP rate of women - ages 55-59, 60-64, 65-69 Source; Brugiavini, Pasini, Weber 2015

7. Employment by age, men

8. Employment by age, women

9. 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 3219

10. 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

11. Social Security In Brief 1969 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

12. Social Security Reforms 1992 “Amato” Reform Benefits less generous Legal (old age) retirement age gradually reaching 65 (men) 60 (women) 1995 “Dini” Reform Notionally defined contribution pension benefits Window of retirement ages (57-65) with actuarial penalty To become fully operational after 2030 (Grandfathering)

13. Eligibility for old age pension – private sector employees 2008-2011 same as above same as above

14. Year Private employee Age + Contributive yearsContributive years 1974-35.. 1994-35 1995-35 199652+3536 199752+3536 199854+3536 199955+3537 200055+3537 200156+3537 200257+3537 200357+3537 2004 57+35 38 2005 57+35 38 200657+3539 200757+3539 200858+3540 200958+3540 201059+3640 201160+3640 Eligibility for early retirement pension

15. 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

16. Old Age Pension: Post-2012 Eligibility Requirements

17. Early Retirement Pension: Post-2012 Eligibility Requirements

18. Earliest age at which Soc Sec Benefits become available Source; Brugiavini, Pasini, Weber 2015

19. 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

20. 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+

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

22. How retirement age evolved SHIW data, only retired individuals

23. 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

24. Estimates of Earnings Profiles (INPS data)

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

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

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

28. OLS of SSW/10000 Age 1.485*** 1.502*** 1.477** 1.489** Age square -0.011*** -0.011** Female -1.783*** -1.778*** -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. 1992 1992-1995 0.205 0.202 -0.233 -0.234 1996-2011 -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* 0.118 Education -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 0.51 OBS11526 11168 Determinants of SSW - SHIW

29. 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

30. 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

31. Mean OV for men (left) and women (right) – Cohort 1945-1949 (SHARE) Source; Brugiavini, Peracchi 2014

32. 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

33. 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

34. 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).

35. Health index: PCA 1 component Question Comp1 Difficulty lift/carry0,2897 Difficulty push/pull0,2864 Difficulty stoop/kneel0,2838 Difficulty walking0,2825 Difficulty climbing stairs0,2799 Difficulty getting up from chair0,2699 Difficulty with an ADL0,2694 Self-reported health (fair or poor)0,2566 Difficulty reach/extend arms0,2406 Doctor visit (number)0,2042 Difficulty sitting two hours0,2012 Ever experience arthritis0,1952 Difficulty pick up a dime0,1871 Back problems0,1836 Source; Brugiavini, Peracchi 2014

36. 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 -0.010-0.008 Hquint_3 -0.004 -0.003 -0.001 Hquint_4 -0.004 -0.002-0.004-0.002 Hquint_5 -0.021** -0.020** -0.025** -0.023** Age 0.123*** 0.122*** Age squared -0.001*** Female0.0040.008 Married-0.005-0.007 Occupation: high skill-0.002-0.004 Occupation: low skill 0.004 0.006 High School 0.008 0.009 > High School 0.003 0.009 Age dummiesNo Yes N0bs 2,302 2,009 Pseudo-R2 0.1120.1140.1120.114 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