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Academic year 2020/2021

Course ID
Mariacristina Rossi (Lecturer)
2nd year
Teaching period
Second semester
Related or integrative
Course disciplinary sector (SSD)
SECS-P/01 - economia politica
Formal authority
Type of examination
Type of learning unit

Sommario del corso


Course objectives

Intertemporal choices with and without uncertainty

Complete and Incomplete credit and insurance markets

The certainty equivalence model

Precautionary savings

Uncertainty over the lenght of life and the role of life insurance (annuities)

Imperfect insurance and the role of public pension systems

Pay-as-you -Go and funding the pension systems

DB versus DC methods of calculating pensions

Retirement choices

Pension reforms

The role of Financial Literacy in saving and retirement choices


Results of learning outcomes

1) Knowledge and understanding
Economic and psychological determinants of savings; functioning of both public and private pension systems; incentive and redistributive effects of pension systems.
2) Applying knowledge and understanding
Application are possible to both simulation and econometric models.
3) Making judgments
Improving the ability to understand the economic determinants of savings, to evaluate the cost-effectiveness of different insurance programs, to compare the cost of different saving products.
4) Communication skills
To acquire greater precision of concepts and language and to learn the economics behind welfare programs
5) Learning skills

For a successful in learning, students must acquire a good familiarity with economic, financial and risks concepts



Pension systems are designed to meet three main objectives: to allow people to smooth consumption in their life cycle; to prevent poverty in old age; to establish a compact among generations. These goals, in their turn, are meant to insure individual risk, to overcome individual planning limitations and to provide some sharing for aggregate risks. Within the first category of risks, longevity and earnings risks are predominant; within the second, myopia and time inconsistency have to be addressed; within the third, demographic, economic and political risks should be as much diversified as possible.

Starting from this framework, the course aims at placing European pension systems and reforms in the context of the economic theory of households' savings, where imperfect and incomplete (financial and insurance) markets make room for the state to play an insurer's role, besides its traditional redistributive tasks. The logic behind the "insurance perspective" does not imply giving up the traditional objective of solidarity, both within and between generations; indeed, this aim is strengthened by highlighting the key role of risk diversification. Furthermore, thanks to an analytical framework based on insurance, measures aimed at achieving a given distributional goal are easily designed; while, if the insurance framework is ignored, redistribution in practice ends up with unforeseen and undesirable features.
Covered topics are:

i. Microeconomic foundations of retirement savings • Basic deterministic saving models: the LCH and the PIH (intertemporal optimization models: assumptions and main results) • Introducing uncertainty • Certainty Equivalence • Permanent Income Hypothesis
• Euler Equation • Precautionary savings • Life uncertainty and its effects. • The introduction of (actuarially fair) life insurance and the dominance of annuities • Why is the market for annuities everywhere so thin? • Why are reverse mortgages almost ignored?

ii. An economic analysis of social security (micro and macroeconomic features of social security) • Financing mode: PAYG vs. Funding • Pension formulae (DB vs. DC) • Actuarial fairness and neutrality • Measures of financial sustainability • Measures of adequacy • Redistribution (both within and between generations) • Incentive structure • (Induced) retirement • The aggregate pension wealth (debt) iii. Theoretical and empirical models of retirement • Stylised facts about retirement • Determinants of retirement choice • The implicit tax on postponing retirement (and related measures)
iv. The economics of pension reforms and the importance of Economic-Financial Literacy
• A political economic approach to social security • Assessing the political sustainability of social security reforms • EFL: concept, measurement, stylized facts, consequences of illiteracy

The Course is organized with Lectures, followed by discussions, and possibly a small written composition at the end of the course.



Course delivery

The Course is organized with Lectures, followed by discussions, and possibly a small written composition at the end of the course.


Learning assessment methods

Written examination:

h.:1.30, maximum mark 30/30, which can be reached by summing the marks obtained in the different questions (generally three questions)

Integration with an oral only after specific advice by the professor


Support activities

It lab sessions to introduce the use of households data (Bank of Italy data on households)


Suggested readings and bibliography

Selected references

1. Browning, M., A. Lusardi, 1996, "Household Saving: Micro Theories and Micro Facts", Journal of Economic Literature, 34, 1797-1855.

2. Barr N, P. Diamond, Reforming Pensions, 3.

3. Diamond, P. 2004, 'Social Security', The American Economic Review, 94(1), March 2004

4. Diamond Peter, 2005, "Social Security Rules that Vary with Age", in: Fornero, E. and P. Sestito (eds), 2005, Pension Systems: Beyond Mandatory Retirement, Cheltenham: Edward Elgar

5. Disney, R., "Actuarial-based public pension systems", in: G. Clark, A. Munnell and M. Orszag, The Oxford Handbook of Pensions and Retirement Income, OUP, 2006.

6. French E, 2005, The Effects of Health, Wealth and Wages on the Labour Supply and Retirement, Review of Economic Studies, vol 72, no 2, April , 395-427.

8. Fornero E., Economic-financial literacy and (sustainable) pension reforms: why the former is a key ingredient for the latter, Bankers, Markets & Investors, 134, January-February 2015.

9. Geanakoplos J., O.S. Mitchell, S. P. Zeldes, 1998, "Social Security Money's Worth", PaineWebber WP Series in Money, Economics and Finance 98-05, Columbia Business School, August.

10. Lindbeck A. and M. Persson, 2003, "The Gains from Pension Reform", Journal of Economic Literature, vol. 41 (1), pp. 74-112.

11. Mitchell O. S., S. P. Zeldes, 1996, "Social Security Privatization: a Structure for Analysis", American Economic Review, 86(2), pp: 363-67

12. Scholtz K. Seshadri A., Khitatrakun S., 2006, "Are Americans Saving "Optimally" for Retirement?" Journal of Political Economy, 114(4), pp. 607-643.



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Class scheduleV

  • Open
    Enrollment opening date
    01/03/2020 at 00:00
    Enrollment closing date
    31/12/2022 at 23:55
    Last update: 25/05/2020 14:14
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