Federal Planning Bureau Economic analyses and forecasts What are the consequences of the AWG projections on the adequacy of social security pensions? An application of the dynamic cross- sectional microsimulation model MIDAS for Belgium, Germany and Italy MIcrosimulation for the Development of Adequacy and Sustainability Final conference of the AIM project, October 20 th, 2008

Federal Planning Bureau Economic analyses and forecasts  Introduction: Sustainability and adequacy  Why microsimulation?  MIDAS  General characteristics  Demographic module  Labour market module  Simulation results  Belgium  Germany  Italy  Conclusions

Federal Planning Bureau Economic analyses and forecasts Introduction: Sustainability and adequacy Source: EC (2006) Table 3.3, page 71.

Federal Planning Bureau Economic analyses and forecasts Introduction: Sustainability and adequacy   But the sustainability and adequacy of pensions are two sides of the same coin   Assumptions and projections underlying the assessment of sustainability affect adequacy   productivity growth, wages, employment, the link between wages and benefits   Not all aspects of the adequacy of pensions are reflected by the replacement rate   (re)distributional impact, poverty, the link between wages and benefits so… An assessment of the sustainability of pension systems should take into account the adequacy of pension benefits.

Federal Planning Bureau Economic analyses and forecasts Introduction: Sustainability and adequacy   We therefore need a model that can simulate indicators of adequacy, while aligning to the assumptions of the AWG.   replacement rate, inequality, poverty.   since the AWG assessment of sustainability is prospective, so should the assessment of adequacy. DYNAMIC MICROSIMULATION MODEL “MIDAS” (Microsimulation for the Development of Adequacy and Sustainability)

Federal Planning Bureau Economic analyses and forecasts A classification of microsimulation models MIDAS

Federal Planning Bureau Economic analyses and forecasts The MIDAS team   Federaal Planbureau (FPB)   Raphaël Desmet, Frédéric Verschueren, Gijs Dekkers   Deutsches Institut für Wirtschaftsforschung (DIW).   Hermann Buslei, Johannes Geyer, Viktor Steiner, Dirk Hofmann   Instituto di Studi e Analisi Economica (ISAE)   Maria Cozzolino, Paola Tanda, Michele Raitano, Simone Tedeschi   Other important contributors   Cathal O’Donoghue (TEAGASC) and Geert Bryon (FPB)

Federal Planning Bureau Economic analyses and forecasts FPB - management and coordination -Demographic module -pension module Belgium DIW -labour market module - pension module Germany ISAE -pension module Italy Geert Bryon Cathal O’Donoghue LIAM-MIDAS MIcrosimulation for the Development of Adequacy and Sustainability Alignment to AWG projections and assumptions: -fertility -mortality -proportional size of working population -inactive states -labour productivity -social policy hypotheses

Federal Planning Bureau Economic analyses and forecasts   Mortality, fertility: AWG- projections (2005)   Education   Step 1: Monte Carlo-routine ‘assigns’ an educational attainment level to every 10-year old.   Step 2: The individual enters the labour market at an age determined by the level of eduation.   Partnership formation : the ‘marriage market’ module The demographic module

Federal Planning Bureau Economic analyses and forecasts The labour market module IN WORK EMPLOYEE PUBLIC SECTORCIVIL SERVANT PUBLIC SECTOR PENSION SCHEME PRIVATE SECTOR PENSION SCHEME SELF-EMPLOYED PENSION SCHEME No Yes No Yes MONTHS OF WORK HOURS OF WORK BY MONTH HOURLY WAGE XX WIDOW(ER)S PENSION BENEFIT

Federal Planning Bureau Economic analyses and forecasts The labour market module IN WORK No UNEMPLOYMENT DISABILITY EARLY-RETIREMENT, UNEMPLOYMENT FOR OLDER WORKERS, … RETIREMENT OTHER INACTIVE Yes PUBLIC SECTOR PENSION BENEFIT PRIVATE SECTOR PENSION BENEFIT SELF-EMPLOYED PENSION BENEFIT Disability benefit Early retirement benefit, unemployment benefit for older workers, … WIDOW(ER)S PENSION BENEFIT

Federal Planning Bureau Economic analyses and forecasts Simulation Results for Belgium

Federal Planning Bureau Economic analyses and forecasts The demographic module: The age pyramid

Federal Planning Bureau Economic analyses and forecasts The labour market module: The employment status (age≥16)

Federal Planning Bureau Economic analyses and forecasts The labour market module: The employment status (age≥16)

Federal Planning Bureau Economic analyses and forecasts The Belgian social security pension system   Separate Bismarckian PAYG schemes for employees in the private and public sectors and self-employed. Civil servants pensions are regarded as deferred earnings.   Employees:   Disability benefits   Conventional Early Leavers’ Scheme (CELS)   Old-age retirement scheme   Surviving Spouse benefit   Civil Servants:   Disability benefits   Old-age retirement scheme   Surviving Spouse benefit   Self-Employed:   Minimum pension   Old-Age Guaranteed Minimum Income (GMI) MIcrosimulation for the Development of Adequacy and Sustainability

Federal Planning Bureau Economic analyses and forecasts Belgium: replacement rates

Federal Planning Bureau Economic analyses and forecasts Belgium: gini of earnings and pension income

Federal Planning Bureau Economic analyses and forecasts Belgium: the poverty situation of pensioners and workers

Federal Planning Bureau Economic analyses and forecasts Simulation Results for Italy

Federal Planning Bureau Economic analyses and forecasts The Italian social security pension system   PAYG schemes for employees in the private and public sectors and self-employed. For workers entered in the labour market before 1996 the benefit is based on earnings and different rules are applied depending on sector and seniority; for the new entrants (after 1995) a NDC system is introduced.   The system guarantee:   Disability benefits   Old-age retirement scheme   Surviving Spouse benefit   Means tested minimum benefit (only for “regime retributivo”)

Federal Planning Bureau Economic analyses and forecasts Italy: replacement rates

Federal Planning Bureau Economic analyses and forecasts Italy: gini of earnings and pension income

Federal Planning Bureau Economic analyses and forecasts Italy: the poverty situation of pensioners and workers

Federal Planning Bureau Economic analyses and forecasts Simulation Results for Germany

Federal Planning Bureau Economic analyses and forecasts The German social security pension system   Separate Bismarckian PAYG schemes for employees in the private and public sectors (+ a few self-employed). Civil servants belong to another pension scheme, self-employed are mostly privately insured.   Employees:   Disability benefits   Old-age retirement scheme   Surviving Spouse benefit   Civil Servants:   Disability benefits   Old-age retirement scheme   Surviving Spouse benefit   Self-Employed:   Minimum pension   Old-Age Guaranteed Minimum Income (GMI)

Federal Planning Bureau Economic analyses and forecasts Germany: replacement rates

Federal Planning Bureau Economic analyses and forecasts Germany: gini of earnings and pension income

Federal Planning Bureau Economic analyses and forecasts Germany: the poverty situation of pensioners and workers

Federal Planning Bureau Economic analyses and forecasts Conclusions   Developments of prospective indicators of adequacy are (remarkably) alike.   Replacement rate   Decreases at first, and then recovers in Belgium and Germany   Continuously decreases in Italy, as the earnings-related system is gradually replaced by the NDC system   Inequality of pension benefits increases at first, and then decreases again. The redistributive impact of pensions will increase from the early 2020’s in Germany, and late 2020’s in Belgium and Italy.   Risk and intensity of poverty of those receiving only pension benefits is higher than earnings-recipients in Belgium and Germany. It starts off lower in Italy, but increases throughout the simulation period.   The risk of poverty of pension benefit recipients increases at first, and decreases afterwards.

Federal Planning Bureau Economic analyses and forecasts Thank you for your attention Grazie per il vostro attenzione Danke für Ihre Aufmerksamkeit Dank voor uw aandacht Merci pour votre attention

Federal Planning Bureau Economic analyses and forecasts Observed levels of eduational attainment Table 1: Observed education levels (percentages of age groups). age group coeduach BE DE IT Source: LFS

Federal Planning Bureau Economic analyses and forecasts At what age does one enter the labour market? Observed participation rates to age and ISCED-level, Belgium, 2002 Source: AWG-projected education expenditures, Eurostat Table 2: average ages of education ending ISCED BelgiumGermanyItaly (2002) 27 (from 2003 on) 5/62328 (up to 2006)25 (up to 2004) 27 (from 2007 on)26 (from 2005 on) Table 3: theoretical ending ages for level of education. ISCED BelgiumGermanyItaly Source: European Commission, 2005, Table IX.1., page 145.

Federal Planning Bureau Economic analyses and forecasts The ‘marriage market’ person is ‘selected’ to find a partner “marriage market” -link individuals -create a new household Marriage or cohabitation? Divorce?Separation? DivorcedMarried Single Marriage? Cohabiting Marriage Cohabitation Noyes Married Cohabiting YesNo Yes No

Federal Planning Bureau Economic analyses and forecasts The ‘marriage market’ … 1 p(1,1)p(1,2)p(1,3) … 2 p(2,1)p(2,2)p(2,3) … 3 p(3,1)p(3,2)p(3,3) … 4………… 5 6 … Males selected for the marriage market Females selected for the marriage market age, age difference dummy of working dummies for eduational attainment levels p=partnership( ♀ x, ♂ y)=max{p(x,y|x)} of the remaining y