ITALY - The transition from defined benefit to defined contribution following the major pension reforms of the nineties will "dramatically reduce" the redistribution features of Italy's pension system, new research has found.
The study Distributive Properties of Pensions Systems: A Simulation of the Italian Transition From Defined Benefit to Defined Contribution by the Center for Research on Pensions and Welfare Policies assessed how the redistribution features of the pension system would be affected by the reforms, which will be fully phased in, for the flows of new pensions, after 2030.
Findings revealed the new notional defined contribution (NDC) system, which does not have a direct redistribution aim, will reduce the inequities of the previous system, which was “intrinsically redistributive” and operated a “perverse” redistribution from the poor to the rich.
“Redistributive” features of the old system included the non-linearity of the annual pension accrual rate, survivors’ benefits, and the calculation of notional contributions for workers temporarily out of the labour force.
The study focussed on the long transition process, during which retiring workers will be entitled to benefits calculated with a pro-rata mechanism – an average of the DB and NDC benefit, weighted for the number of years spent in each regime.
“We found that the pension system for the cohort born in 1955 (starting to retire from 2010) is highly redistributive along many dimensions, not just earnings,” the study noted.
“This is due to the working of the modified defined benefit formula and to the residual heterogeneity of rules governing the different schemes still in place at this time. For subsequent cohorts, in parallel with the phasing in of the NDC system, redistribution in all dimensions is also gradually reduced, to reach a minimum level in the new steady state.
“By ensuring uniformity of treatment among different categories of workers, the new system thus dramatically reduces both the perverse and “good” redistribution of the past. The first effect is certainly positive; the second follows from the aim to separate the insurance from the assistance goal of the pension system, in order to improve its transparency.”
Results were calculated using a model developed by the research centre that simulated varied lives and earnings histories for individuals belonging to various groups, and computed their pension benefits, covering the various stages of the transition process until the reforms will be fully implemented.
The study noted that the adequacy of benefits under the new system will crucially depend on the characteristics of the labour market. “From this perspective, it is possible that our results underestimate the dimension of the problem if future working careers will be more flexible and discontinuous with respect to the past,” the report stated.
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