Blog post

Italy’s pension spending: Implications of an ageing population

The Italian debate on the pension system predominantly focuses on short-term aspects, neglecting relevant longer-term fundamentals. Based on long-term

Publishing date
26 April 2018

During the euro-zone sovereign crisis, Italy – in line with other stressed countries – introduced a major pension overhaul, known as the ‘Fornero reform’, aimed at tackling the revealed unsustainability of the system.

This reform has been – and continues to be – at the centre of a long-lasting political debate in the country. This debate predominantly focuses on the short-term aspects of the system, and neglects relevant longer-term fundamentals.

With this blog post, we aim to shed light on Italy’s long-term economic and demographic trends and their implications for pension spending.

As an overall trend, total pension expenditure in Italy stood at 16.5% of GDP in 2015 – ranking second-highest in the EU28, after Greece (Figure 1).

As in every other EU country, the largest pension expense item in Italy in 2015 was old-age pensions. Interestingly, Italy’s ‘survivor pensions’ spending was the highest, in percentage-of-GDP terms, across all EU countries in the same year at 2.7% – possibly because of the relative wider coverage of those pensions (Andrle et al., 2018).

In order to understand the long-term sustainability of a pension system, it is necessary to take into consideration the underlying demographic trends.

As outlined by the European Commission’s Working Group on Ageing Populations and Sustainability (AWG), the demographic old-age dependency ratio (the number of people aged 65 or above, as a percentage of the number aged 15-64) is on an irreversibly increasing path in the whole EU.

In Italy, according to the latest report by the Ministry of the Economy and Finance (MEF), the dependency ratio will increase from 33.7% in 2015 to more than 60% in 2070 (Figure 2).

This means that while in 2015 there were roughly 34 pensioners for every 100 workers, in 2070 there would be 60 pensioners for every 100 workers. The dependency ratio is projected to peak at 63% in 2050, and then decrease to 60%.

Even if the ‘Fornero reform’ moved towards a more just intergenerational distribution of burden (Hüttl, Wilson, and Wolff, 2015), rapid ageing will likely put pressure on pension spending.

MEF projects pension spending to remain at current levels, as a percentage of GDP, until 2040 and then progressively decrease in the following decades (Figure 3). This projection is based on a series of optimistic assumptions, such as a sizeable pick-up in employment rate and a growth in real GDP per capita and real labour productivity of around 1.75% annually – far above what has been observed for the last few decades.

However, by relaxing some of the underlying assumptions and the implied economic growth profile, pension spending as a percentage of GDP would be significantly higher. We quote two alternative scenarios to capture the breath of uncertainty that surrounds these estimates.

While in 2015 there were roughly 34 pensioners for every 100 workers, in 2070 there would be 60 pensioners for every 100 workers.

Using UN population projections – which assume faster demographic deterioration in Italy by comparison to the MEF – an IMF study by Andrle et al (2018) projects that pension spending would peak at a level above 20% of GDP in 2040.This implies a four-percentage-point difference with the MEF’s pension-spending projection. As the relative share of pensioners under the notional defined contribution scheme grows, pension spending is projected to structurally decline after 2040.

Using 2018 AWG assumptions (which consider, for example, higher steady state unemployment rate), Andrle et al (2018) project Italy’s pension spending to peak at 18.4% of GDP in 2040.This implies a deviation of more than two percentage points from the MEF’s pension-spending projection.

Italy’s pension spending will reach a peak at a 20-year horizon, when most of the people born during Italy’s 1960s ‘baby-boom’ will retire.

These projections illustrate that Italy’s pension spending will reach a peak at a 20-year horizon, when most of the people born during Italy’s 1960s ‘baby-boom’ will retire. After this 2040 peak, the demographic pressure will progressively decrease as fewer people enter the pension system, reflecting the lower birth rates representative of more recent trends.

The Italian government currently contributes around 30% of its overall annual public spending (net of interest expenses) to pensions (Centro Studi e Ricerche di Itinerari Previdenziali, 2017). Both of the alternative scenarios shown above imply a deterioration of Italy’s public finances in the future (all other things being equal).

In our view, Italy’s public debate on the future of the pension system should take into consideration alternative long-term demographic and growth assumptions, to reflect a more accurate picture of the risks that lie ahead.

About the authors

  • Simone Tagliapietra

    Simone Tagliapietra is a Senior fellow at Bruegel. He is also a Professor of EU Energy and Climate Policy at The Johns Hopkins University - School of Advanced International Studies (SAIS) Europe.

    His research focuses on the EU climate and energy policy and on the political economy of global decarbonisation. With a record of numerous policy and scientific publications, also in leading journals such as Nature and Science, he is the author of Global Energy Fundamentals (Cambridge University Press, 2020) and co-author of The Macroeconomics of Decarbonisation (Cambridge University Press, 2024).

    His columns and policy work are widely published and cited in leading international media such as the BBC, CNN, Financial Times, The New York Times, The Economist, The Guardian, The Wall Street Journal, Süddeutsche Zeitung, Frankfurter Allgemeine Zeitung, Corriere della Sera, Le Monde, El Pais, and several others.

    Simone also is a Member of the Board of Directors of the Clean Air Task Force (CATF). He holds a PhD in Institutions and Policies from Università Cattolica del Sacro Cuore. Born in the Dolomites in 1988, he speaks Italian, English and French.

  • Francesco Chiacchio

    Francesco, an Italian citizen, works in Bruegel as a Research Assistant in the innovation and competition area, with a focus on trade and productivity, as well. Before joining Bruegel, Francesco was a trainee at the European Central Bank, working on projects related to productivity, Global Value Chains and technology diffusion, export intensity, and credit allocation, as well as on macroeconomic projections. He also interned at the European Commission, Directorate General for Competition, involved in projects related to the Directive on Antitrust Damages Action, and provided teaching assistance at the Tinbergen Institute.

    He holds a Master in Economics and Social Sciences from Bocconi University, where he specialized in quantitative methods and microeconomics.

    Francesco’s research interests include industrial and competition policy, firms and competitiveness, international economics and trade, and resource allocation. His personal interest also lies in possible applications of big data.

    He is fluent in Italian and English, and has basic knowledge of German and French.

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