Using Difference in Difference Estimators to Determine the Effect of Pension Reform on Private Savings in Italy

Abstract

This paper examines the effect on private savings of two separate reforms to Italian public pensions: the Amato Reform (1992) and the Dini Reform (1995). The reforms were made with the intention of lightening the governments burden of financing retirement in the face of an aging population. In order to determine the effects, I used difference in difference estimators, which was possible given the structure of both reforms. The data showed no significant change in real or nominal savings as a result of the reforms, but there were significant differences in percent savings. The data suggests that individuals saved a higher percentage as a result of the Amato Reform and a lower percentage as a result of the Dini Reform. Both reforms are expected to decrease the financial burden of pensions on the government. If the results of the Dini Reform tests are accurate, the Dini Reform will also decrease the overall share of annual output that retirees consume. Some of the results of this study, particularly those related to the Amato Reform, can likely be applied and generalized to other similar reforms in OECD countries, while other findings may be unique to this study. This paper contributes to the existing literature in public finance, particularly that related to public pensions