Italy has been urged to rein in the cost of its first-pillar pensions as mounting age-related spending and high public debt intensify pressure on the country’s long-term fiscal sustainability, according to the OECD.

The OECD’s Economic Survey of Italy noted that pensions currently make up a high share of public spending, around 18 per cent of the country’s gross domestic product (GDP) compared to an average of around 12 per cent across OECD countries.

However, it warned that this will rise further due to ageing and the legacy defined benefit (DB) regime.

The report noted: “Pensions and other ageing costs are among the highest across OECD countries and will continue to rise until the mid-2030s before eventually falling as the transition to the reformed pension system advances.

“Pursuing a longer-term strategy for spending and tax policy to manage these pressures would improve fiscal sustainability.

Therefore, it recommended that Italy explores “options within legal constraints to reduce over the medium term the cost of first-pillar pensions to contribute to the sustainability of the public finances amid rising spending pressures”.

It suggested that mechanisms should be developed within constitutional limits to reduce the cost of first-pillar pensions, for example, by reducing the value of high pensions that do not reflect recipients’ contributions.

The OECD stressed that “significant efforts” will be needed to put high public debt on a “more sustainable path” amidst such high pension costs.

“A longer-term strategy is required that intensifies efforts to curb age-related spending, notably pension costs, raises spending efficiency and makes the tax system more effective and growth-friendly,” the report stated.

In addition, it advised that maintaining current rules that link retirement ages and accrual rates to changes in life expectancy and avoiding new incentives to retire early remain important for the pension system’s sustainability.

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