Pensions, sustainability at risk: open letter to Draghi

Open letter from Massimo Angrisani, full professor of Mathematical Methods of Economics and Actuarial and Financial Sciences at the La Sapienza University of Rome, to the Prime Minister, Mario Draghi, on the risks that the Italian pension system will have to face in the near future. Without adequate reforms, the professor maintains, the stability of the system is in danger.

Ch.mo prof. Mario Draghi President of the Council of Ministers,

Mister President,
I am writing this open letter to you in my capacity as Professor of Theory and Actuarial Technique for Social Security to reiterate a problem that I already had the opportunity to highlight about twenty years ago1 and which I have raised several times in the following years without having any response from the class politics, a class to which the protection of national interests is entrusted.
In fact, I believe that everyone must do their part and assume the responsibilities that the competence and role entail and for which they must answer now and in the future, this is why I write.
This issue concerns the sustainability of the Italian pension system.
The Italian pension system is managed on a pay-as-you-go basis, which means that it meets current expenditure for the payment of pensions with current contributions paid by workers. In effect, as I was able to state several years ago, it is an "assisted distribution", as important public transfers are needed to meet current pension expenditure. All this despite the reassurances provided at an institutional level that have systematically guaranteed "the closure of the social security construction sites with balanced accounts". Since the beginning of the nineties there have been at least fifteen definitive closures of the social security construction sites, often accompanied by European praise.
The accounts of the Pension System are currently not balanced.
Three demographic factors will put them further into crisis, undermining their sustainability:

1) the entry into the retirement age bracket of the generations of baby boom, i.e. those linked to the large number of births after the Second World War, which will lead to a further increase in pension expenditure which is already heavily subsidized today by public transfers. The pension management of the demographic wave should have led to the creation of an adequate capital reserve3. On this subject, an example can also be drawn from the case of the Swedish pension system;

2) the lengthening of life expectancy, a phenomenon which can now mark time, but which has certainly not exhausted its effects;

3) the heavy and still persistent decrease in births which was recorded starting from the second half of the 60s of the last century. This decline, still ongoing and worsening, has led to a more than halving of the number of current births compared to the number of those born in those years.

The latter phenomenon is evidently correlated with the number of the current and future active and taxpaying population. The decrease in the number of births must be neutralized through interventions to stimulate the birth rate, interventions which however will have operational effects only in the medium-long term and therefore, with this awareness, it is necessary to intervene in the short term with effective controlled immigration policies.

In the light of what has just been said on the current demographic structure and trend of our country, the frequent utterances on the sustainability of the Italian pension system based on the assumption for the system itself of the hypothesis of "steady state”, or of economic-demographic stability, a hypothesis that is completely unrealistic, in particular, with reference to what has been said, with reference to the country's demographics.

I would not like the belief, repeatedly professed by "pension experts", that the transition to the contributory system, achieved through the 95 Reform, guarantees the sustainability of the Italian pension system, to regain strength.
The transition to the contribution calculation system is not sufficient for its sustainability: it is good that this concept is clear to all those who express opinions on the matter. One account is the method of calculating the pension, the other account is the financial management system. Certainly in the context of contributions, financial management is feasible in a certain and effective way, but one must know the relative theory5.

I would also like to point out the other rather widespread belief that the problem of sustainability has only an economic value and that is that a strong economic recovery can solve the problem of sustainability of the pension system. Without wanting to go into the merits of economic growth with declining demographics, it should be noted that, in a pay-as-you-go pension system, there are essentially two rates that produce the overall sustainability return of the system: the rate of change in the number of assets and the rate of change in the average wage. If the former is heavily negative, it also drags the overall rate negative.

Without wanting to go into the actuarial merits of the matter, simply considering a pay-as-you-go pension system where the ratio between active and retired is equal to two, it means that a pension is paid with the contributions of two assets. If the ratio of active to retired people drops to one, a pension is paid with the contributions of a single active member and therefore, in terms of average salary, the pension is halved.

A good wage dynamic of the contributing asset obviously helps, but the fact remains that the pension system has the contributions of only one asset available to pay a pension.
In the light of the above, thinking of expanding pension expenditure, as feared by many, would have a highly onerous and long-term impact on the system, ending up weighing heavily on future generations who will certainly also suffer the unforeseen costs deriving from current pandemic.

I think it appropriate that before assuming new measures to expand spending, it is necessary to verify the sustainability of the Italian pension system, starting from the degree of debt of the system itself. In my opinion, it is necessary to calculate exactly the debt of the pension system and to plan interventions on the basis of this.

Lastly, I would like to invite you to consider the opportunity to return to public management of information on the Italian Social Security System with the restoration of the Social Security Expenditure Evaluation Unit.

I thank you for the attention you will devote to my letter and I send you my best wishes for your difficult work.

Massimo Angrisani