How to Strengthen the Credibility of the Italian Pension Reform

As a result of the reform process undertaken in the 1990s, the Italian pension system has replaced a generous but unsustainable Defined Benefit formula with a Notional Defined Contribution (NDC) formula and opened the path for voluntary-based second and third pillars. While the reform has put the system on a sustainable path, its most relevant side effects consist in the transfer of the pension risk to the individuals, who are then more exposed to the consequences of unfavourable economic cycles and to financial crises. The extremely slow phasing in of the reform, however, undermines its credibility and raises risks of it backfiring. We propose three measures to avoid this: (1) acceleration of the full adoption of the NDC formula, to achieve uniformity of treatment of genders, cohorts, and working categories, (2) elimination of incentives to early retirement and introduction of flexible retirement, and (3) promotion of financial literacy.