Demographic Changes and Fiscal Sustainability of the Italian Pension System: An Agent-Based Modelling Approach

Ongoing demographic changes driven by increased life expectancy and declining fertility rates are starting to exert pressure on Pay-As-You-Go pension schemes, which depend on the transfer of resources from the employed population to the retired one. Existing research presents mixed conclusions on the effectiveness of various policy measures designed to ensure the long-term fiscal sustainability of pension systems.This paper contributes to the literature by employing a tailored Agent-Based Model (ABM) for Italy, which integrates demographic and pension dynamics. The model evaluates the impact of policies aimed at increasing labor market participation, specifically reducing the number of NEETs, boosting female labor force participation, introducing more flexible retirement options, increasing immigration and raising fertility rates. Projections extending to 2070 indicate that the aging process will persist, leading to a continued deterioration in the fiscal balance of the Italian pension system, despite the automatic adjustments to the retirement age linked to variations in life expectancy. The results indicate that promoting labour participation significantly enhances the sustainability of the pension system. In particular, policies aimed at increasing female participation emerge as the most effective individual intervention. However, no single measure, nor any combination of the simulated policies, is sufficient to place the Italian pension system to a fullysustainable trajectory.