Exploring the potential of microsimulation for the study of poverty, health, and social security in the developing world. The MicroHGC model IMA 2011 Martin Spielauer (IIASA) Landis MacKellar (IIASA)

Organization -Context -The MicroHGC Model -General outline -Implementation -Illustrative results -Life course income -Distribution of returns -Pension income & poverty -Conclusions & Discussion

Context -Technical Assistance project of the Asian Development Bank: introduction of the New Pension System (NPS) in India -Examples from: Landis MacKellar, Martin Spielauer (forthcoming 2011) NPS and the Individual Saver: a Microsimulation Analysis. In: Implementing Pension Reforms for Financial Inclusion: Policy Issues and Options for India; Asian Development Bank -MicroHGC: generic version, developed at IIASA -Tool for research & capacity building -MS for study of poverty, health & social security

Context -Developing world setting -Less detailed data -Fundamental policy choices -High inequality (no mean/representative agent) -MS complementing stylized macro accounting models -Adding flexibility & distributions; reproducing macro -Transparent, simple to understand and operate -Evolvement of project: -actuarial macro model -Idea to add calculations for some “typical cases” -Cases, cohorts, population.. -… reproduction of macro model with added information

Context – Indian NPS -The NPS is a version of the public sector pension plan for “unorganized sector” = 89% of population -Voluntary, minimum contribution of 500Rs (10$) / month -Enhanced investment choices (investment strategy & 6 funds) -Non-withdrawable -EET tax regime: contribution & accrued earnings exempt, Taxable at withdrawal (ongoing discussion) -Low fees compared to existing private plans -2$PPP/day poverty line; 1.25US$ nominal = 60Rs -Median male work income ~3000 Rs/month (60US$)

Model – General Outline BehaviourMacroMicro FertilityUN projection, urban / rural # births + list of typical families Open population, case based MortalityUrban / rural, 1% decrease per year identical Migration1% rural -> urbanidentical LMPscenarios+ duration in state WagesAverage, fixed growth scenarios + distribution: log-normal Gini mobility Sickness, disabilityScenarios Pension savingFixed %+ boundary condition: 2$PPP, minimum contribution 500Rs, normal & max saving rate NPSFixed interest, Stylized fees, enrolment scenarios, annuitized at 60 + Detailed fee structure + Rule-based enrolment + inheritance

Model – Implementation -Implemented in the generic microsimulation language Modgen developed and maintained at Statistics Canada

Illustration: Life course income, 1992 cohort

Illustration: Life course income, 2002 cohort

Illustration: Distribution of IRR, 1992 cohort

Illustration: Pensions by earning deciles

Illustration: Pensions and poverty

Illustration: Pensions and health expenditures

Illustration: Pensions and fees

Conclusions -Application side -Illustration of limits of private saving for old age income security -Enhancements -Education -Generic tool, capacity building -Questions concerning microsimulation: -Do such simple stylized models make sense (or leave this type of modeling to macro community?) -Are developing countries a good application area of microsimulation -Best strategy for improving MS models for this type of application?