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									                Social Security Incentives and Retirement Decisions in
                           Italy: An Empirical Insight
                                                   by Luca Spataro†

    Understanding how individuals decide the timing of retirement has become a critical question for Italy,
where tightening reforms of the National Social Security (SS from now) system have already been
introduced in early 90s and other reforms are likely to be implemented in the next future. Yet, studies
assessing the determinants of retirement are very recent and results are still contradictory, so that very little
can be said about the effectiveness of any reforms in improving activity rates.
    While there appears a general consensus on the generosity of the SS system to be the leading explanation
of the sizeable exit rates from labor force at early ages occurred in Italy so far, there is still little evidence on
the degree of sensitivity of workers to such incentives. Clearly, this issue is preliminary and necessary to the
implementation of whatever reform aiming at encouraging the postponement of retirement and, in general,
at improving the activity rates.
    Moreover, the pronounced spike in retirement at the “normal age” (age 60) documented in previous
works is an empirical puzzle whose nature requires further investigation. Intuition suggests that the spike
has much to do with retirement rules, that is with eligibility constraints, and with a significant preference for
leisure. However to my knowledge no studies have explicitly dealt with this issue.

    The aim of the present work is twofold: on the one hand, to give a contribution to better understand the
nature of the trade-off connected to choice of retiring; on the other hand, to provide an empirical analysis
in order to investigate the responsiveness of Italian male employees to the early retirement incentives
provided by the Social Security system and to propose an explanation to the to the puzzling spike of
retirement at age 60.

    As for the former goal, I propose some new measures of Social Security incentives for early exits from
labor force: the first of them is called the Marginal Cost of Retirement (MCR). Coherently with economic
theory, such parameter captures the trade-off comprised in the choice of delaying retirement by one year.
Furthermore, a straightforward extension of the MCR allows to obtain a more forward looking measure of
SS wealth accruals, referred to as the Minimum Cost Value (MCV). Finally, following the same strategy, I
present an extension of the already existing Accruals, which I refer to as the Minimum Tax Value (MTV). I
also compare the time pattern of such measures with those adopted in previous studies (Accruals, Option
Value, Peak Value).
    From a methodological point of view, my starting point are two important lessons given by the recent
literature on retirement and carried out for other countries.
    First, as several authors have pointed out, retirement is likely to be a decision undertaken by rational,
forward looking individuals who, in order to maximize their lifetime utility, typically contrast present SS
wealth accumulation opportunities with those at some time in the future. Starting from the work by Stock
and Wise (1990) on the Option Value of retirement, many works have shared this assumption and assessed
its relevance by both estimating structural forms (like Rust (1989), Gustman and Steinmeier (1986) and
Rust and Phelan (1997)) and reduced forms of retirement decisions (Lumsdaine, Stock and Wise (1992)
and, for Italy, Brugiavini and Peracchi (2001)). The reduced form approaches are most directly related to the
methodology adopted in the present paper. Second, some recent studies (Krueger and Pischke (1992) Coile
and Gruber (2000) and Chan and Stevens (2001)), have highlighted the importance of the identification
problem of the retirement incentive effects estimated by reduced forms. In other words, these authors stress
the difficulty to disentangle the role of earnings from the “pure” SS incentives, since the latter are a (non
linear) function of the former and, in turn, the former are likely to be endogenous to unobserved tastes for
    For this reason I carry out a panel analysis by applying a discrete-time duration model on the male
employees sample drawn from the Bank of Italy Survey on Households’ Income and Wealth (SHIW).

   Dipartimento di Scienze Economiche, Università di Pisa, via C. Ridolfi 10, 56124 Pisa (Italy). E-mail:
    In particular I discriminate between Public Sector and Private Sector employees and control for the role
played by other socio-demographic variables and by eligibility rules so as to explain the determinants of
retirement choices occurred since late 1980s through the mid-1990s. Notice that such period is particularly
interesting in that the 1993 and 1995 SS reforms, which have tightened eligibility rules and cut SS benefits,
provide an exogenous source of variability in the data and, thus, should help getting robust statistics.
    The paper proceeds as follows. I begin with the institutional features of the Italian SS system prior to and
after 1990s reforms respectively. Next, after sketching the main findings of previous related literature in
Italy, I describe the meaning of the new measures I use for capturing the early retirement incentives. In the
next sections I describe the empirical strategy adopted for obtaining the panel, contributions and wages
necessary for computations and present the main features of the SS incentives prior to and after reforms.
Finally, I present the econometric results and concluding remarks.
    As for the SS incentives to early retirement, results show that:
    1)It is necessary to discriminate between Public and Private Sector, since eligibility rules and benefit
computations (more favourable for the latter) and reform impacts have been substantially different for these
categories of workers. I do find evidence of strong incentives to early retirement for Public Sector
employees before reforms. In fact for such workers SSW was substantially decreasing with respect to age;
moreover, the one-year dynamic incentives (MCR, Accruals) confirm the relevant “tax” levied on the
prosecution to work provided by SS system prior to reforms: in particular the median MCR was abundantly
lower than the current wage (about 29% of current salary) and decreasing for almost all ages. As for the
Private Sector workers, calculations show that the contribution requirement for retirement eligibility has
been binding for the majority of Private Sector workers, which has been probably understated in previous
works: however, also such workers enjoyed strong incentives to retire once the normal age (age 60) had
been reached. However, some of the forward-looking dynamic measures (particularly the negative values of
both RMCV and MTV for both Sectors) reveal the presence of incentives for postponing retirement which
may have been contrasting (or even offsetting) the impact of the former incentives.
    2) Early 1990s reforms have reduced the median SSW by about 20% and the median Peak Value by
almost one percentage point less; however, among eligible workers, Public Sector employees appear to have
borne most of the burden of reform cuts, with higher penalizations on early retirement. There also comes out
that younger cohorts have been and will be more dramatically in the future the net-payers for the rebalance
of the Italian SS system. In fact, both the generous pre-reform benefits and the reduction of the forward-
looking incentives to postpone retirement (RMCV and MTV) occurred in the transition phase of reforms has
provided the older cohorts with a substantial incentives for exiting the labour force.
    Empirical estimates can be summarized as follows:
    2) It is not the absolute value of SSW that matters in retirement choices, but, rather, the RR ratio. Such
parameter is by far the most important (in terms of Likelihood gains) among the whole set of SS measure
incentives analyzed.
    3) Neither short sight (i.e. one-year Accruals/Costs) or more forward looking dynamic measures of SS
incentives turn out to be significant in the original specification adopted for computations. In fact only the
Option Value measure presents coefficients with univocally correct signs; however, such coefficients are
significant only when the Option Value are computed according to previous estimations. Among other
forward-looking measures, also the MTV coefficients present the correct sign and are significantly different
from zero. As a consequence, I can conclude that male Italian employees appear to have been aware of and
exploited the incentives they were provided with for early retirement: short sight measures seem to have
played a prevailing role in determining the timing of retirement, even though evidence of (some) forward-
looking behavior cannot be statistically rejected.
    4) The age 60 spike does appear to be significant only when associated to the first year of eligibility: in
other words, the analysis brings evidence of binding eligibility constraints rather than “rules of thumb”
applying by the normal of retirement.
    5) As for other socio-economic factors, family composition and coordination in retirement choices
within the household does seem to play a role for Public Sector employees only; on the other hand, Private
Sector employees turn out to be particularly concerned with the achievement of eligibility and of a “safe”
standard of living: in fact, for the latter category of workers house-ownership before retirement seems to be
an especially relevant goal.

   JEL Nos. H55, J26

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