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 http://www.plan.be 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

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

4. 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

7. 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)

8. DIW -labour market module - pension module Germany • FPB • - management • and coordination • Demographic module • pension module Belgium • 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 O’Donoghue LIAM-MIDAS ISAE -pension module Italy

9. 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

10. 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 HOURS OF WORK BY MONTH HOURLY WAGE MONTHS OF WORK X X WIDOW(ER)S PENSION BENEFIT

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

12. Simulation Results for Belgium

13. The demographic module: The age pyramid

14. The labour market module: The employment status (age≥16)

15. The labour market module: The employment status (age≥16)

16. 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

18. Belgium: gini of earnings and pension income

19. Belgium: the poverty situation of pensioners and workers

20. Simulation Results for Italy

21. 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”)

22. Italy: replacement rates

23. Italy: gini of earnings and pension income

24. Italy: the poverty situation of pensioners and workers

25. Simulation Results for Germany

26. 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)

27. Germany: replacement rates

28. Germany: gini of earnings and pension income

29. Germany: the poverty situation of pensioners and workers

30. 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.

31. Thank you for your attentionGrazie per il vostro attenzioneDanke für Ihre Aufmerksamkeit Dank voor uw aandachtMerci pour votre attention

32. Table 1: Observed education levels (percentages of age groups). Observed levels of eduational attainment Source: LFS

33. Observed participation rates to age and ISCED-level, Belgium, 2002 Source: AWG-projected education expenditures, Eurostat At what age does one enter the labour market? Table 2: average ages of education ending Table 3: theoretical ending ages for level of education. Source: European Commission, 2005, Table IX.1., page 145.

34. person is ‘selected’ to find a partner Married Cohabiting • “marriagemarket” • link individuals • create a new household Marriage Cohabitation Marriage or cohabitation? Divorce? Separation? yes No No Yes Marriage? Yes Divorced Married No Cohabiting Single The ‘marriage market’

35. The ‘marriage market’ Males selected for the marriage market age, age difference dummy of working dummies for eduational attainment levels Females selected for the marriage market p=partnership(♀x,♂y)=max{p(x,y|x)} of the remaining y