Social Security Incidence under Uncertainty Assessing Italian Reforms

This paper analyzes the effects induced by reforms of the Italian social security system in an economic setting with uncertainty on wages, financial market returns and life expectancy. The introduction of a pension system reproducing the Italian statutory scheme turns out to be beneficial in ex-ante welfare terms, due to a favorable variation in net transfers to individuals. Once social security budget is forced to balance in every period, however, transfers substantially decrease and the relative convenience of social security falls dramatically. Risk insurance effects do occur as social security is introduced, but they are largely outweighed in magnitude by transfer effects in the overall welfare variation. When comparing different pension regimes introduced in Italy by the last reforms, a slight ex-ante welfare improvement is shown to be brought about by the new pension system, after assuming away differences in lifetime transfers across regimes. This relative gain stems from risk diversification across all working-life wages in computing benefits. Moreover, the new pension system ideally provides individuals with stronger incentives to postpone retirement