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The Actuary The magazine of the Institute & Faculty of Actuaries
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Retirement expectations, pension reforms, and their effect on private wealth accumulation

How do individuals perceive and react to changes in pension legislation? Do people increase their saving and labour supply in response to a reduction in benefits? Is private wealth a good substitute for social security contributions? Estimating future pension benefits is always a difficult task. For the working population, expected pension wealth depends, among other things, on the age at which workers expect to retire and on the expected rate of pension benefits to pre-retirement earnings: the replacement rate. This CEPR paper attempts to estimate the impact pension reforms have on people’s perceptions about their future replacement rate – a convenient summary index of the generosity for the pension system.

This study uses a large representative survey of the Italian population carried out by the Bank of Italy, which gives retirement age and replacement rate expectations from 1989 to 2002. Over this period, the Italian government enacted three reforms. The main features of these reforms were an increase in the retirement age and minimum years of contribution for pension eligibility, abolishment of seniority pensions for all those who started after 1995, a gradual reduction in pension benefits, and indexation of pension benefits to prices rather than wages. The ultimate effect of these reforms was to reduce the replacement rate of young workers relative to older Italians.

The main finding is that workers have revised expectations in the direction suggested by the reform, but the adjustment is far from complete. For instance, while the perceived replacement rate of the self-employed falls by about 10 percentage points between 1989–91 and 2000–02, in reality the rate fell by about 20 points. Moreover, the authors find that the offset between pension wealth and private wealth is only partial, at around 50%. This suggests that the effect of pension reform on individual behaviour depends critically on the extent of knowledge and information that individuals have about the social security system and changes to it.

[Authors: Renata Bottazzi (Institute for Fiscal Studies and University College, London), Tullio Jappelli (University of Salerno and CEPR), and Mario Padula (University of Salerno)”