The Italian Pension Gap: a Stochastic Optimal Control Approach

TL;DR

This paper models the Italian pension gap using a stochastic optimal control approach, proposing a target-based investment strategy to partially bridge the pension disparity caused by reforms.

Contribution

It introduces a stochastic optimal control framework to determine investment strategies that help fill the pension gap in Italy post-reform.

Findings

Late retirement and stagnant careers increase pension gap impact.

Dynamic careers and early retirees are most affected by the reform.

Target-based investment strategies can partially mitigate pension shortfalls.

Abstract

We study the gap between the state pension provided by the Italian pension system pre-Dini reform and post-Dini reform. The goal is to fill the gap between the old and the new pension by joining a defined contribution pension scheme and adopting an optimal investment strategy that is target-based. We find that it is possible to cover, at least partially, this gap with the additional income of the pension scheme, especially in the presence of late retirement and in the presence of stagnant career. Workers with dynamic career and workers who retire early are those who are most penalised by the reform. Results are intuitive and in line with previous studies on the subject.