The Italian Pension Gap: A Stochastic Optimal Control Approach

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.