Totally unfunded vs. partially funded pension systems: the case of Italy

Under uncertain rates of growth of the economy and real yields, portfolio theory predicts an optimal pension arrangement consisting of pay-as-you-go (PG) and funded pension schemes. The paper explains the almost exclusive PG character of Italian households» pension wealth on the basis of its past returns, higher and less uncertain than financial yields. Recent reforms have created the conditions for pension portfolio diversification, but the transition is hampered by the difficulty in lowering the high contribution rates needed to honour past promises. The prospects of pension funds in Italy are assessed under different hypotheses, showing that many decades will be necessary to build up a substantial funded pension wealth.