1. Federal Planning Bureau Economic analyses and forecasts Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE Some work in progress Jean-Charles Wijnandts 1 and Raphaël Desmet 2 and Gijs Dekkers 3 1. University of Liège (student internship at the FPB) 2. Federal Planning Bureau 3. Federal Planning Bureau and Katholieke Universiteit Leuven Paper presented at the Ministero dell'Economia e delle Finanze, Rome, February 15 th, 2011

2. Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE: some work in progress  Overview of this presentation  A very short introduction to the option value approach  Why including the option value approach?  The current situation  How to include the option value approach in the alignment process?  Some very preliminary simulation results

3. Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE: some work in progress  Overview of this presentation  A very short introduction to the option value approach  Why including the option value approach?  The current situation  How to include the option value approach in the alignment process?  Some very preliminary simulation results

4. Federal Planning Bureau Economic analyses and forecasts A very short introduction to the option value approach* * Note the word “approach” here.

5. Federal Planning Bureau Economic analyses and forecasts A very short introduction to the option value approach The notion of actuarial neutrality involves setting the gains from postponing retirement by just one year against the associated losses

6. Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE: some work in progress  Overview of this presentation  A very short introduction to the option value approach  Why including the option value approach?  The current situation  How to include the option value approach in the alignment process?  Some very preliminary simulation results

7. Federal Planning Bureau Economic analyses and forecasts Why including the option value approach?  The current version of MIDAS_Be has all kind of behavioural equations, but they lack any theoretical underpinning and have no explicit inclusion of retirement incentives.  The Belgian first-pillar employees’ pensions is highly actuarially non-neutral (Dekkers, IJM, 2007) and this affects the retirement decision (Dellis et al., in Gruber and Wise, 2004).  In the absence of an option value approach, the impact of any policy measure aiming to reduce actuarial imbalance on the retirement decision is likely to be underestimated by MIDAS.

8. Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE: some work in progress  Overview of this presentation  A very short introduction to the option value approach  Why including the option value approach?  The current situation  How to include the option value approach in the alignment process?  Some very preliminary simulation results

9. Federal Planning Bureau Economic analyses and forecasts The labour market module in MIDAS_BE I

10. Federal Planning Bureau Economic analyses and forecasts The labour market module in MIDAS_BE II

11. Federal Planning Bureau Economic analyses and forecasts The labour market module in MIDAS_BE III

12. Federal Planning Bureau Economic analyses and forecasts The labour market module in MIDAS_BE IV

13. Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE: some work in progress  Overview of this presentation  A very short introduction to the option value approach  Why including the option value approach?  The current situation  How to include the option value approach in the alignment process?  Some very preliminary simulation results

14. Federal Planning Bureau Economic analyses and forecasts How to include the option value approach in the alignment process? Implicit tax on working longer Alignment for people between 60 and 64 Alignment for people younger than 60

15. Federal Planning Bureau Economic analyses and forecasts The option value approach in MIDAS_BE: some work in progress  Overview of this presentation  A very short introduction to the option value approach  Why including the option value approach?  The current situation  How to include the option value approach in the alignment process?  Some very preliminary simulation results

16. Federal Planning Bureau Economic analyses and forecasts Some very preliminary simulation results Women have on average slightly higher implicit taxes than men Men and women selected at an earlier stage to stop their activity have higher implicit taxes on average than people selected at a later stage.

17. Federal Planning Bureau Economic analyses and forecasts Some very preliminary simulation results

18. Federal Planning Bureau Economic analyses and forecasts Some very preliminary simulation results The general trend is a strong increase of the market withdrawals at age 60 in scenario 2 at the expense of other ages between 61 and 64 years old

19. Federal Planning Bureau Economic analyses and forecasts Some very preliminary simulation results: Gini coefficient

20. Federal Planning Bureau Economic analyses and forecasts Some very preliminary simulation results: poverty risk

21. Federal Planning Bureau Economic analyses and forecasts Conclusions  This variant of MIDAS_BE applies the implicit tax to set the ranking in the alignment of older workers  Men and women selected at an earlier stage to stop their activity have higher implicit taxes on average than people selected at a later stage.  The average pension benefit of the earliest and last leavers decrease as a result of introducing the implicit tax  The general trend is a strong increase of the market withdrawals at age 60 in scenario 2 at the expense of other ages between 61 and 64 years old  The rise in inequality among pensioners during the first two decades is less pronounced and inequality in generally lower when the implicit tax is introduced.  The impact of introducing the implicit tax on poverty risks is remarkably limited.