The study, which started in November 2009, is funded by the Regione Piemonte (Bando Scienze Umane e Sociali 2008) and involves researchers from CeRP as well as from the Departments of Economics, Social Sciences and the Medical School of the University of Turin.

The aim of this project is to understand, under different perspectives, the link between the age profile of earnings and early retirement.

In several developed countries, Social Security is under severe financial stress, mainly due to the aging of their societies. Italy – a typical case - introduced several reforms, but the outlook remains critical, because of an exasperatingly slow phasing in process. Today its pension spending is the second highest in Europe and early retirement and swift aging paint a worrying picture for the near future. In order to tackle this issue it is crucial to understand why we have ended up with a Public Pension System (PPS) that discourages work at old age.

This research claims that academics and policy makers overlooked a causal link between the generosity of Social Security and the age profile of earnings, i.e. the evolution of wages over workers’ careers. In particular, some countries use Social Security to mitigate labor market imperfections. In countries like Italy the labor market is rigid, less favourable to entry, and workers are more highly protected once employed. This leads to higher youth unemployment, which creates downward pressure on young cohorts’ wages. This pressure diminishes as workers age, wages increase (Eurostat Labor Force Survey, 2002), but productivity does not (Skirbekk, 2004). In this group of economies, wages and individual productivity tend to diverge more and more as workers become older and firms have had to lobby the Government to introduce generous Social Security rules that allow older workers to retire earlier. In countries with more flexible labor markets, however, wages track productivity and therefore increase at the beginning of a workers’ career, up to age 45-50, then fall as workers approach retirement. In these economies unemployment rates for young and old workers are similar, even across skill groups. Thus firms have no particular incentive to prefer young workers to older ones. Workers tend to work longer, because their labor demand is stable over time.

Firms and (most) workers operating within rigid labor markets end up preferring a “loose” system: they pay higher social security taxes to support looser retirement requirements.

Paradoxically this “deal” is, at least temporarily, sustainable: on the one hand, firms like to see less productive older workers enter retirement, and hire more productive younger workers; on the other hand, low productivity older workers are happy to take advantage of looser retirement requirements. The coalition between high and low productivity older workers and employers makes a generous PPS politically sustainable, against the interest of young generations, that suffer unemployment and, most importantly, against society as a whole.

Generous and early paid benefits and low entry wages lead to: i) redistribution of resources from future to current generations; ii) redistribution from high to low skilled workers, which for Italy is likely to translate into a redistribution from North to South; iii) underinvestment in education (people invest in education when the expected benefits make up for the lost earnings; thus, people invest more in education the later they retire.); iv) exceedingly low fertility rates.

We adopt a comprehensive and interdisciplinary strategy to address all these points. The study is divided into 4 workpackages:

1. "Public Pension Systems and the Age Profile of Earnings": we develop a general equilibrium macro model to rationalize the cross-country evidence between the age profile of  earnings and early retirement.

2. "Incentive and distributive structures of Public Pension Systems": within a dynamic life cycle microeconomic perspective, we quantify the redistributive impact and the impact on fertility of the PPS.

3. "Italy’s wage and Public Pension System: Behaviors, believes and redistributive criteria: an empirical investigation": we construct and conduct a survey to evaluate the sociodemographic profile of individuals who support or oppose the redistribution undertaken through the PPS, with special attention paid to retirement choices, labor market outcomes, and fertility.

4. "Health and ageing in the employment trajectory: epidemiologic hints for social security policies": we investigate the alternative hypothesis that health conditions shape cross-country differences in retirement patterns.