Which Hp. for which Pension Projections?

Please, find enclosed Reforming Note 24th March 2018.

A recent paper on Italy by IMF contains a chapter dedicated to public pensions.

Basically, it points out that current baseline scenario for medium-long term expenditure projections developed by Italian General Accounting (RGS) could suffer from underestimations.

Critical evaluations of Italian pensions system are not new and normally underline some well know structural aspects, the same briefly described in a previous Reformig Note.

What is now rather surprising in IMF paper is the fact that it raises two punctual and very precise criticisms on the hypotheses at the basis of projection exercises.  In particular, authors refer to three groups of hypotheses: 1) on labor market, 2) on productivity and GDP growth, and 3) on demography and aging. On all three sides, national baseline projections are commented as too optimistic by far.

Though favorable, productivity and GDP growth rates in RGS baseline scenario do not seem lacking “roots”, as one may be tempted to argue after reading some passages of IMF paper (“far above”, “very optimistic”). This editorial paper by Reforming gives arguments in support.

What sounds surely more challenging is to reach immediately that pace of growth and, above all, constantly maintain it over next decade (till 2030), as assumed in RGS baseline scenario as well. This result will need effective and constant support by policy, with clear ideas about growth stimulating choices, and a prompt political scenario of stability and responsibility, as underlined also by ECB President, Mario Draghi, soon after the recent electoral round. It is plausible thinking that what is going to happen in the first years of the projecting horizon will lay the roots for following dynamics.

Discrepancies in demographic projections between IMF and RGS - concentrated in the very next future - seem to play a substantial role in explaining different expenditure projections. What appears contradictory is that even in the very short run (2020) there is a misalignment between the two baseline demo scenarios, more than 0.5 p.p. for the incidence of aged 65+ and almost 2 p.p. for the structural dependency ratio.

Nevertheless, also net of this initial misalignment, during next decade (until 2030) IMF baseline for demo projections almost perfectly overlaps with the high variant demo scenario adopted by RGS. The former is developed by UNDP and the latter by ISTAT.

As far as demography is concerned, is IMF baseline overestimated or ISTAT baseline underestimated?

Surely this point needs to be investigated and clarified in order not to weaken relevance and utility of projecting exercises for grounding economic policies.

March, the 24th 2018