Contribution-based vs. earnings-related retirement pension systems: some policy proposals for Italy

This paper analyses the relationship between contributions paid and benefits received within the current old age pension scheme, evaluating the implications of reinforcing the link between individual contributions and benefits, in a framework where welfare assistance and social security are kept separate. Section 2 describes the theoretical model, adopted to examine the factors affecting the contribution-based and the earnings-related annual pension or the total pension benefits over the entire retirement period. The consequences that different levels of relevant parameters have on the ratio between the two yearly pensions are, then, analysed. Section 3 illustrates the longitudinal sample of private employees belonging to the National Institute for Social Security (INPS–FPLD), in particular of those who will retire between 1995–96 and 2001: it is used to calculate the annual earnings-related and contribution-based pension. In aceteris paribussituation, allowing for all intragenerational redistribution transfers currently provided by the pension system (through a supplement to an established minimum pension, through ceilings and reversory rights), the annual contribution-based pension appears to be in 1995 about two thirds of the annual earnings-related one. This implies that the State could currently save one third of its expenditure for new FPLD pensioners, by simply switching to a criterion of social security fairness (giving each to his own in actuarial terms) without relinquishing any of the distributive corrections currently enacted within the pension system. Through this potential reform, in the next 7 years total State savings at constant prices would reach 14 000 billion lire, or 2·2% of the stock value of pensions in the same time interval.