What are the consequences of the AWG projections on the adequacy of social security pensions?

1
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

Final conference of the AIM project, October
20th, 2008
MIcrosimulation for the Development of Adequacy
and Sustainability
2

• Introduction Sustainability and adequacy
• Why microsimulation?
• MIDAS
• General characteristics
• Demographic module
• Labour market module
• Simulation results
• Belgium
• Germany
• Italy
• Conclusions

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Introduction Sustainability and adequacy
Source EC (2006) Table 3.3, page 71.
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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.

5
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)

6
A classification of microsimulation models
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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 ODonoghue (TEAGASC) and Geert Bryon (FPB)

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• FPB
• - management
• and coordination
• Demographic module
• pension module Belgium

DIW -labour market module - pension module Germany

• Alignment to AWG projections and assumptions
• fertility
• mortality
• proportional size of working population
• inactive states
• labour productivity
• social policy hypotheses

MIDAS
MIcrosimulation for the Development of Adequacy
and Sustainability
Geert Bryon Cathal ODonoghue LIAM-MIDAS
ISAE -pension module Italy
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The demographic module

• 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

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The labour market module
IN WORK
PUBLIC SECTOR PENSION SCHEME
PUBLIC SECTOR
CIVIL SERVANT
Yes
Yes
Yes
No
No
PRIVATE SECTOR PENSION SCHEME
EMPLOYEE
No
No
SELF-EMPLOYED PENSION SCHEME
MONTHS OF WORK
HOURS OF WORK BY MONTH
HOURLY WAGE
X
X
WIDOW(ER)S PENSION BENEFIT
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The labour market module
IN WORK
Yes
WIDOW(ER)S PENSION BENEFIT
No
Disability benefit
UNEMPLOYMENT
PUBLIC SECTOR PENSION BENEFIT
DISABILITY
PRIVATE SECTOR PENSION BENEFIT
Early retirement benefit , unemployment benefit
for older workers,
EARLY-RETIREMENT, UNEMPLOYMENT FOR OLDER
WORKERS,
RETIREMENT
SELF-EMPLOYED PENSION BENEFIT
OTHER INACTIVE
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Simulation Results for Belgium
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The demographic module The age pyramid
14
The labour market module The employment status
(age16)
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The labour market module The employment status
(age16)
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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
17
Belgium replacement rates
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Belgium gini of earnings and pension income
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Belgium the poverty situation of pensioners and
workers
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Simulation Results for Italy
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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)

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Italy replacement rates
23
Italy gini of earnings and pension income
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Italy the poverty situation of pensioners and
workers
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Simulation Results for Germany
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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)

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Germany replacement rates
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Germany gini of earnings and pension income
29
Germany the poverty situation of pensioners and
workers
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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 2020s in Germany, and late 2020s
  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.

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Thank you for your attentionGrazie per il vostro
attenzioneDanke für Ihre Aufmerksamkeit Dank
voor uw aandachtMerci pour votre attention
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Observed levels of eduational attainment
Table 1 Observed education levels (percentages
of age groups).
age group age group
coeduach 15-19 20-24 25-29 30-34 35-39 40-44 45-54 55-64
BE                
2 76.64806 18.58212 19.76188 24.71155 29.94236 36.83929 45.20956 58.33101
3 23.27647 61.05629 39.92269 38.82334 37.64811 34.75905 30.09483 23.13584
4 0.075468 20.36158 40.31544 36.46511 32.40952 28.40166 24.69561 18.53315
DE                
2 93.80496 26.72806 15.99285 14.39922 13.8595 14.55439 16.18396 22.67366
3 6.094359 69.41556 66.55831 60.54127 59.99991 59.73254 58.63573 56.23855
4 0.100682 3.856381 17.44884 25.05951 26.14058 25.71306 25.18031 21.08779
IT                
2 87.82532 30.1709 35.03164 43.30291 47.13405 49.78745 59.62008 75.95568
3 12.16894 68.46313 53.7635 43.74991 41.71595 39.34312 30.01928 17.58733
4 0.005746 1.365976 11.20485 12.94718 11.15 10.86943 10.36064 6.456985
Source LFS
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At what age does one enter the labour market?
Table 2 average ages of education ending
ISCED Belgium Germany Italy
1 12 11 11
2 14 17 14
3 18 20 19
4 21 21 25 (2002)
27 (from 2003 on)
5/6 23 28 (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 Belgium Germany Italy
1 11 10 10
2 13 16 13
3 18 19 18
4
5 21 25 23
6 23 28 31
Source European Commission, 2005, Table IX.1.,
page 145.
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The marriage market
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The marriage market
Males selected for the marriage market
1 2 3 4 5 6
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

age, age difference dummy of working dummies for
eduational attainment levels
Females selected for the marriage market
ppartnership(?x,?y)maxp(x,yx) of the
remaining y