Generational Accounting: The Case of Italy
This paper considers the implications of the current course of Italian fiscal policy for existing and future generations of Italians. Italy has a very high debt-to-GDP ratio as well as a significant Social Security program. These aspects of fiscal policy would, by themselves, raise concerns about the size of the burden to be passed on to future generations. But the concern is compounded by the demographic transition under way in Italy. Like the United States, Japan, and most other western European nations, Italy is "aging" due to its low fertility rate. Unless this rate increases, the proportion of Italians aged 60 and over will rise during the next four decades from 20 percent to almost 30 percent. At the same time, the absolute size of the Italian population will fall by 27 percent. The implication of this aging process is that there will be relatively few young and middle-aged workers in future years to share the burden of the Italian government’s massive implicit and explicit liabilities.
To determine the size of the burden slated to be passed on to future generations of Italians, we utilize a new technique for understanding generational policy - - generational accounting. This approach indicates a huge difference in the projected lifetime net tax treatment of current and future Italians, even after one accounts for the fact that future generations will pay more net taxes because of growth. Unless Italian fiscal policy is dramatically and quickly altered, future generations will be forced over their lifetimes to pay the government four or more times the amount that today's newborns are slated to pay given current policy. Such large payments may not be feasible, because they could exceed the lifetime incomes of those born in the future. If Italian generational policy is indeed on an unsustainable trajectory, those Italians who are now alive will ultimately be forced to pay much more than suggested by current policy.
Franco, Daniele, Jagadeesh Gokhale, Luigi Guiso, Laurence Kotlikoff, and Nicola Sartor. 1992. “Generational Accounting: The Case of Italy.” Federal Reserve Bank of Cleveland, Working Paper No. 92-08. https://doi.org/10.26509/frbc-wp-199208