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A reform process is under way in Italy. Achieving financial sustainability of the social
security system has been the first objective characterizing the reforms of 1990s, but these
have also introduced rules which aim at a more actuarially fair system. Indeed the social
security system prevailing in Italy, financed on a PAYG basis, was, at the end of the
1980s, clearly unsustainable and also extremely unfair to some group of workers,
enacting a form of perverse redistribution which is typical of “final salary” defined
benefit systems. It was also a system characterized by strong incentives to retire early.
In this paper we briefly describe the different regimes of the Italian pension system in its
recent history and focus on some aspects of the reform process taking place during the
1990s. Since economists and policy makers are still struggling to assess the results and
the long-term effects of these reforms we provide both a survey of this debate and some
fresh evidence on the evaluation of the policy changes. We carry out this analysis with a
particular emphasis on two aspects which are relevant in the debate. On the one hand we
stress the role of economic incentives and the overall fiscal implications of changing the
systems as well as these incentives. On the other hand we emphasize the intergenerational
considerations and the political implications of the ageing process of the Italian
population. From our description it emerges that the overall design of the Italian reform is
probably a good one, and yet some more steps need to be taken to speed up some of the
positive effects of the reform process that, due the adverse demographic trends affecting
PAYG systems as well as the political arena, could easily evaporate.
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