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The option value approach in MIDAS_BE

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.

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The option value approach in MIDAS_BE

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  1. The option value approach in MIDAS_BE Some work in progress Jean-Charles Wijnandts1 and Raphaël Desmet2 and Gijs Dekkers3 1. University of Liège (student internship at the FPB) 2. Federal Planning Bureau 3. Federal Planning Bureau and KatholiekeUniversiteit Leuven Paper presented at the Ministerodell'Economia e delleFinanze, Rome, February 15th, 2011

  2. 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. 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. A very short introduction to the option value approach* * Note the word “approach” here.

  5. 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. 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. 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. 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. The labour market module in MIDAS_BE I

  10. The labour market module in MIDAS_BE II

  11. The labour market module in MIDAS_BE III

  12. The labour market module in MIDAS_BE IV

  13. 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. How to include the option value approach in the alignment process? Alignment for people younger than 60 Implicit tax on working longer Alignment for people between 60 and 64

  15. 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. 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. Some very preliminary simulation results

  18. 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. Some very preliminary simulation results: Gini coefficient

  20. Some very preliminary simulation results: poverty risk

  21. 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.

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