Italian Pension System Faces Sustainability Challenges Amidst Demographic Shifts

The Italian government and majority coalition are set to remember the 2026 budget session as a challenging experience, marked by internal disagreements amidst opposition criticisms. The core issue revolves around pension reforms and their long-term sustainability.

Pension System Overhaul

Negotiations faltered when attempting to defuse the pensions issue, a topic of great interest to Italians who view retirement as a form of personal social achievement. Even young, newly hired employees reportedly inquire about their future retirement eligibility from their first day on the job.

Italy's pension system includes an early retirement option based on years of contributions, separate from standard age-based retirement. However, even the requirements for this early retirement have become stricter in recent years.

Current Requirements for Early Retirement

Currently, early retirement requires 42 years and ten months of work for men and one year less for women. Despite these requirements, the average age at retirement is 61.7 years. These generations, on average, receive pensions for 80% of the time they worked. There's a trend where baby boomers may spend as much time in retirement as they did working.

To ensure fairness and system sustainability, considerations must extend beyond just years worked to include the duration of pension payments. The current pay-as-you-go system, where current workers fund existing pensions, places a burden on future generations. Italy faces a situation where large, early-working generations are reaching retirement age with long life expectancies, while younger generations face declining birth rates, delayed entry into the labor market, and precarious employment.

Consequently, organizations like the OECD, Istat, Upb, Rgs, and Banca d’Italia, along with leading demographers, emphasize the need to extend working lives.

The OECD's latest report suggests that prolonging working life is necessary not only to “unlock labor resources” but also to alleviate the pension burden on younger generations facing the economic challenges of demographic aging and slower income growth.

Automatic Adjustment Mechanism

Italy has implemented an automatic adjustment mechanism, linking retirement requirements to life expectancy increases. The Banca d’Italia described the legislative path of this mechanism in a document submitted during the budget bill hearing.

Essentially, this mechanism adjusts retirement requirements based on Istat's assessments of demographic changes. Adjustments are implemented through inter-ministerial decrees issued to Inps, the national social security institute. However, the “giallo/verde” government froze this mechanism until the end of 2026 as part of the “quota 100” initiative.

The Meloni government unblocked it early, in 2025, acknowledging that demographic conditions did not warrant an increase in requirements for the 2025-2026 period but forecasting the need for adjustments in 2027-2028. The potential for a three-month increase in retirement requirements triggered controversy, leading the government to legislate an increase in two phases, resulting in additional expenditures of 0.5 billion euros in 2026, 1.8 billion in 2027, and 1.0 billion in 2028.

Government Amendments and League Opposition

The government then introduced an amendment to extend the window for early retirement access until the end of the next decade. This measure aimed to further postpone early retirement access through adjustments to the early retirement “windows.” This sparked opposition from the League party.

Despite the controversy, the indexation mechanism, crucial for the system’s sustainability, remains confirmed, at least for now. Without further changes, the administrative conditions for adjusting retirement requirements will need to be verified in 2028, similar to the adjustments made in 2013, 2016, and 2019, which resulted in increases of three, four, and five months, respectively, without significant opposition.

Giancarlo Giorgetti, the Minister of Economy and Finance, is recognized as a strict guardian of public finances, aware of the pension system's crisis given current demographic trends. He has a tendency to create problems for himself, as seen at the start of the budget session when he took ownership of criticisms of the fiscal aspects of the budget that were not directed at him. However, he successfully preserved the crucial issue of requirement indexation.

Several factors contribute to the challenges facing the Italian pension system. Here's an overview of the key elements:

Impact on Future Generations

The current structure places a considerable burden on younger generations. The following table illustrates potential future scenarios:

OECD Recommendations

The OECD and other institutions have consistently recommended extending working lives to alleviate the pressure on the pension system. The following table summarizes key recommendations:

Challenges and Considerations

Implementing pension reforms is politically sensitive. The following table outlines potential challenges:

The sustainability of the Italian pension system remains a critical concern, requiring ongoing dialogue and strategic policy adjustments to address demographic shifts and ensure generational equity. The following table provides a summary of key indicators.

Future Outlook

Future adjustments to the pension system will likely involve a combination of measures, including further increases in the retirement age, changes to contribution rates, and modifications to benefit levels. The following table illustrates potential future adjustments.