Arrests began last month, with 53 people allegedly collecting disability pensions for blindness, the Italian news agency ANSA reported. Investigators said the pensioners got the money while carrying out activities like driving and reading.
Salvatore Alaio, 36, a member of the district council, was charged with masterminding the scheme, steering pensions to his friends and relatives.
Investigators examined city records and discovered 400 people collecting pensions for mental illness in one district. Most Naples districts had about 40 disabled mentally ill.
The scam may have cost the government as much as one million euros ($1.4 million) during the past three years, ANSA said.
Francesco Emilio Borrelli, an official with the Green Party, said he knows one woman who is genuinely disabled. But he said she refused to apply for a pension because the system is "illegal."
"It is people like her who were most damaged, who suffered the most from this shameful fraud," Borrelli said.