Pensions: How the Contribution Calculation Works

Three methods for calculating your pension

The pension calculation it is carried out through three different methods: the contributory system, the remunerative system and the mixed system. Each of these criteria provides different rules for determining the amount of the monthly allowance due. Any ordinary citizen who wishes to retire today must verify that they can do so, that is, they must ensure that they possess all the required requirements. To calculate the retirement age, i.e. the moment in which the requirements for the old-age pension, whether early or subsidized, are reached, it is necessary to take into account the worker’s age and the years of contributions paid, while to estimate the amount of the social security check it is essential to know the contribution amount.

Understanding how to move within the dense network of rules that regulate the pension calculation system is not simple, but let’s try to clarify.
The pension calculation system was subject to important legislative changes in 1995, the year of the so-called Dini reform (law 8 August 1995 n. 335). In this regime, the pension to which one is entitled is strictly linked to the contributions paid over the entire working life and not to the salaries of the last period, as was the case with the previous remuneration system. The introduction of the new calculation mechanism was aimed at rebalancing, once full capacity was reached, social security spending, which had reached unsustainable levels in the period before the reform.

However, for workers who complete the pension requirements, three main cases may occur:

• Workers with at least 18 years of contributions accrued up to 31 December 1995 and therefore application of the salary calculationmore convenient because it is based on the average salaries of the last years of one’s career;
• Workers with less than 18 years of contributions accrued as of 31 December 1995 and therefore application of the mixed calculationremunerative until 1995 and contributory for subsequent periods of activity;
• Workers hired after 1 January 1996 and therefore application of the system contribution calculation. The Monti Fornero reform, i.e. the legislative decree of 6 December 2011 n. 201, converted into law 22 December 2011 n. 214, then provided for the extension of the contribution calculation to all workers starting from 1 January 2012.

What differences lie behind the different pension calculation systems

The salary method is considered the most convenient calculation method of the pension, because it takes into consideration the average of the salaries of the last years of work and the seniority of work, i.e. the number of years of work up to a maximum of 40. The rate of return is equal to 2% per year for salaries and incomes lower than the limits set by law, or less than 2% for higher salaries and incomes.

The contributory methodInstead, it is the most widespread system to date. Used in many forms of pension advances introduced by the legislator, such as the «Women’s Option», it is a method considered penalizing especially for the new generations, and for those workers who have discontinuous careers and low salaries.
All contributions accrued by the worker and paid to the social security institution during his entire working life, revalued on the basis of the rate calculated periodically by ISTAT according to the GDP, form the contribution amount on which the pension is calculated. To find out the amount of the allowance, simply multiply the annual pensionable salary by the calculation rate (equal to 33% for employees). The percentage of annual salary, thus set aside for pension purposes, is then updated with a variable annual revaluation rate based on the nominal GDP growth of the last 5 years. All contributions paid contribute to determining the amount of the pension, through the transformation coefficient, i.e. a percentage value which is updated every 2 years and which grows based on the retirement age.

The contributory method is, in practice, less penalizing if you leave work late: the pension will be higher the higher the contribution amount and the transformation coefficient, which increases as the worker’s age increases. For example, the law provides for a coefficient equal to 5.220% for those who retire at 65; and a coefficient equal to 5.575% for those aged 67 or over. At 67 the pension amount will therefore certainly be higher.
Furthermore, every year the INPS determines the contribution maximum for the current year. With circular no. 15 of 28 January 2022, the INPS has indicated a useful value of €105,014.00 as the pension contribution limit, beyond which no contributions are due for 2022. In practice, the portion of salary that may exceed the ceiling does not produce benefits in the calculation of the pension.

Finally, the mixed method or pro-rata it applies to those who, until 31 December 1995, have had less than 18 years of contributions and to those who, on the same date, have had contributions equal to or greater than 18 years. In the first case the worker will have a pension calculated with the salary system until 31 December 1995 and with the contributory system for the following period. In the second case the worker will have a pension calculated with the salary system until 31 December 2011 and with the contributory system from 1 January 2012. An advantageous method therefore, which can generate, according to experts, a monthly pension installment 25 or 30% higher than that calculated with the exclusively contributory method.

How to calculate contributions effectively

To carry out a coherent calculation of your pension allowance without getting lost in complicated calculations, INPS offers everyone a simulator to calculate your pension and retirement age.
Simply go to the official INPS website and access the page dedicated to «My future pension: simulation of your pension». This is a free service that allows you to simulate what your pension will presumably be at the end of your working life. The calculation is based on the legislation in force and on three fundamental elements: age, work history and salary/income.