Between 2011 and 2024, almost 630,000 Italians aged 18 to 34 emigrated from the country. The consequences of such an outflow are, unsurprisingly, significantly affecting Italy and its economy. 42.1 per cent of those who left are university graduates. By moving, they are taking valuable human capital away from Italy. The economic damage is twofold: Italy bears the cost of educating many of these young people, and loses out on the economic return on their skills realised abroad. Any attempt to revive Italy’s economy must confront a central question: why are so many highly educated young people in Italy choosing to leave? It could be said that the main causes for such a phenomenon are Italy’s low wages, limited career prospects, and static labour market. True. But behind these problems lies a structural issue that is the true root of the problem: the Italian pension system.
The cost of supporting the system
One of the main challenges facing the Italian labour market is the high cost of employing workers. The magnitude of the problem becomes clearer when looking at Italy’s tax wedge — the indicator that measures the gap between the total cost of employing a worker and the amount that worker ultimately receives. According to the OECD Taxing Wages 2025 report, Italy’s tax wedge for a single worker earning an average wage stood at 47.1 per cent, compared to the OECD average of 34.9 per cent. A huge part of this burden comes from employer social-security contributions — how Italy finances its pension system — which make up a substantial share of around 30 per cent of employers’ total costs. To put it into perspective, a worker earning €2000 net per month, once social contributions, regional taxes and other employer-related costs are included, costs an employer €3300 per month. The consequences of this system are foreseeable: employers are disincentivised to hire and promote, which reduces innovations and investments. This hurts everyone: for employers, higher labour costs limit the scope for new hires and wage increases; for workers, it means lower average incomes.
The pension system’s burden extends beyond the labour market. The government already spends more than 15 per cent of GDP on pension expenditure, a figure projected to exceed 17 per cent by 2040. In comparison, public spending on education is expected to remain close to 3.6 to 4.1 per cent of GDP, according to the OECD projections. Such contrast between government spending on pensions and education shows the generational imbalance that Italy has. To put it bluntly: it spends more than five times as much funding pensions as educating the generations who will pay for them.
An ageing system under pressure
Demographic trends are only making the problem harder to manage. Italy’s population is ageing rapidly as the number of working-age citizens continues to decline. Fewer workers are supporting an increasing number of retirees, placing increasing pressure on public finances. This pressure is visible in reports from the National Social Security Institute: in 2024 alone, the institute received more than €180bn that was transferred from the central government and financed through general taxation. €180bn that could have otherwise been used on healthcare, education, or public infrastructure. This creates a self-reinforcing cycle. The state relies on high labour taxes and social contributions to finance the public expenditure, but those same charges reduce disposable income, raise the cost of employment, and weaken economic growth. When employment and growth remain weak, fewer workers contribute to the system, and as a result, a heavier burden is placed on those who remain in the workforce. The consequence is a growing generational imbalance: younger generations are expected to sustain the system while being offered weaker wages and poor economic prospects.
The question then remains on how Italy can ease the pressure on the young generations without undermining the welfare state. The current government is cautiously trying. The 2025 Budget Law reduced the labour tax wedge for employees with annual incomes up to €40,000. Government estimates put the fiscal cost at around €18bn per year. This policy does offer relief, but it does not address the broader structural pressures behind Italy’s social security costs. An efficient tax decrease for employees requires a larger amount of public funding, which can be obtained by reforming the current pension system. To achieve this, the aim should be to make the welfare state sustainable for future generations, not to shrink it.
Reforming the generational bargain
Other nations’ policymaking suggest that it is possible for pension reform to ease long-term fiscal pressure without dismantling the welfare state. Norway’s 2011 pension reform is often cited as a useful example of how a pension system can adapt to demographic ageing. The reform introduced a flexible retirement age between 62 and 75 and tied pension benefits to life expectancy. OECD projections suggest that such changes helped reduce long-term pension expenditure from an estimated 14 per cent to around 11 per cent of GDP by 2050. A 2016 study published in the Journal of Public Economics shows an effect on Norwegian’s behaviour too; labour supply amongst individuals aged 63 to 64 increased from 30 to 46 per cent.
Italy should adapt some of these reforms to its own system. One option would be to limit unjustified forms of early retirement that place additional pressure on the system. Greater transparency to assist policymakers would require a clearer separation between contributory pensions and welfare assistance in public finances. Pension indexation could also be reconsidered, especially when active workers do not benefit from the same level of protection and growth fails to keep up with inflation. Another idea is to recalculate pensions based on an individual’s final salary, rather than on their lifetime contributions to the system. In particular, these pensions could be recalculated according to the current contribution-based system, taking into account the contributions actually paid over the course of a person's working life. Finally, the introduction of a mandatory supplementary pension, based on gradual investments in global markets during the worker’s life, could diversify retirement income and reduce some of the pressure.
The purpose of such reform would not simply be to reduce the pension expenditure. It could also redirect resources towards reducing employers’ social contributions and greater investment in education. Lower labour costs would encourage hiring, investing, and salary increases without increasing employment costs. For young professionals, this could translate into greater disposable income and improved career prospects. Stronger economic growth could broaden the tax base, helping to offset some of the revenue lost through lower labour taxation. Education spending should focus on narrowing the gap between academic training and labour-market needs while ensuring greater support for research and innovation. Better alignment between employment and education could improve labour productivity, enhance social mobility, and create stronger incentives for young Italians to remain in the country.
Before anything can change, my generation needs a wake-up call. We must stop considering low-wages jobs and poor working conditions as bad luck and start realising what they truly are: the product of a broken generational bargain. But we also must confront a harsh truth. With a political system that is not open to losing the votes of the elderly and is not interested in long-term change, leaving Italy is not an act of surrender. It is the only way to pursue a decent and satisfying work career.
