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Pensions and retirement, Dynamic microsimulation

Research articles · Aug 31, 2018

The impact of the retirement decision and demographics on pension sustainability: A dynamic microsimulation analysis

Concepció Patxot, Meritxell Solé, Guadalupe Souto, Martin Spielauer

Departament de Teoria Econòmica, Universitat de Barcelona, Spain; Departament d’Economia Aplicada, Universitat Autònoma de Barcelona, Spain; Austrian Institute of Economic Research (WIFO), Austria

Volume 11(2) Summer 2018

Cite as: C. Patxot, M. Solé, G. Souto, M. Spielauer; 2018; The impact of the retirement decision and demographics on pension sustainability: A dynamic microsimulation analysis; International Journal of Microsimulation; 11(2); 84–108. doi: 10.34196/ijm.00181

Abstract

This paper investigates how retirement decisions, in interaction with demographic changes, impact on pension system sustainability. To do so, we introduce behaviour into a dynamic microsimulation model applied to the Spanish case. Specifically, the retirement decision is modelled using a reduced-form survival model that provides information on retirement hazards, which are then used to calculate times to retirement within the microsimulation model. This model allows us to account for behavioural responses. For example, the behavioural reaction to the 2011 reform improves pension system sustainability, despite individuals opting to retire later to obtain higher benefits. The positive effect (increase in contributions and reduction in time spent in retirement) is greater than the negative effect (increase in pension levels). Additionally, the model allows us to show how the positive effects of the education transition and higher rates of female and olderworker participation contribute to reducing the negative impact of population ageing.

This article contains 13 figures and 8 tables.

Figures

Figure 1. Average wage and pension growth rates (1995–2060).
Figure 2. Behavioural versus non-behavioural model.
Figure 3. Effects of the 2011 reform on the level of entry pensions (% change).
Figure 4. Effects of the 2011 reform on the number of entry pensions (% change).
Figure 5. Effects of the 2011 reform on the pension expenditure to wage bill ratio (% change).
Figure 6. Educational attainment by gender.
Figure 7. Proportion of population with university studies employed in the highest contribution group.
Figure 8. The effect of education on pensions (% change).
Figure 9. Labour force evolution (2008–2060). Baseline.
Figure 10. The effect of higher female participation on pensions (changes in %).
Figure C.1. Effect of the current crisis on pensions (level and number).
Figure C.2. Effect of the current crisis on other indicators.
Figure G.1. Effect of the current crisis on pensions (level and number).

Tables

Table 1. Retirement model (Hazard ratios).
Men Women
Age 43.08 ** 77.87 **
Age Sq. 0.972 ** 0.968 **
Secondary studies 1.050 ** 1.142 **
University studies 1.062 ** 1.271 **
First year retired 2.042 ** 2.545 **
Unemployed 0.313 ** 0.000
Unemployment benefit 1.000 * 1.000
Wage (1000 € change) 0.994 ** 0.993 **
PV(a) 0.995 ** 0.992 **
Time to max. pension 0.930 ** 0.968
Age at max. pension 1.000 1.000
Replacement rate 1.146 ** 1.199
Minimum pension 0.926 ** 0.862 **
Months since eligible(log) 2.627 ** 3.182 **
Unemployment rate 0.986 ** 0.991
Constant 0.000 ** 0.000 **

Base category: less than secondary.

**Significant at 5º% level.

**Significant at 10º% level.

Difference with respect to maximum pension, 1000 € change.

Table A.1. Hazard rate model for retirement with SSW incentives.
Men
Hazard ratio		 Standard error Women
Hazard ratio		 Standard error
Age 154.48 47.83 ** 9.909 4.223 **
Age Sq. 0.952 0.002 ** 0.971 0.003 **
Secondaty studies 0.916 0.028 ** 0.890 0.045 **
Universitary studies 0.943 0.032 * 0.966 0.062
First year retired 4.176 0.164 ** 3.805 0.409 **
Unemployed 0.673 0.026 ** 0.726 0.038 **
Unemployed benefit 0.287 0.069 ** 0.222 0.072 **
Wage (1000 € change) 0.910 0.000 ** 0.943 0.000 **
SSW 1.000 0.000 ** 1.000 0.000 **
PV(a) 0.994 0.000 1.000 0.000
Time to PV 0.899 0.015 ** 0.892 0.022 **
Age at PV 1.002 0.000 ** 1.002 0.000 **
Replacement rate 0.972 0.015 * 1.151 0.037 *
Minimum pension 1.391 0.050 ** 2.131 0.101 **
Months since elegible (log) 1.937 0.031 ** 1.554 0.037 **
BR (1000 € change) 1.002 0.000 ** 1.000 0.000 **
Unemployment rate 1.009 0.002 ** 1.018 0.004 **
Constant 0.000 0.000 ** 0.000 0.000 **

Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.

Table B.1. Yearly wage estimations Dependent variable: yearly wage (full-time equivalent).
Men Coef Std. Err. Women Coef. Std. Err.
Past wage 0.516 0.000 ** 0.560 0.000 **
Age 802.42 1.783 ** 633.54 2.153 **
Age Sq. −5.097 0.022 ** −4.022 0.027 **
Immigrant −1846.89 9.804 ** −976.68 12.80 **
Secondary studies 1022.91 5.031 ** 1059.16 5.946 **
University studies 1686.27 8.564 ** 2366.83 8.063 **
Experience 0.042 0.000 ** 0.051 0.000 **
Experience Sq. 0.000 0.000 ** 0.000 0.000 **
Non-manual work 1503.31 4.943 ** 1360.39 5.698 **
Qualified work 3733.78 11.29 ** 3905.67 12.33 **
Year of birth 355.12 0.314 ** 279.10 0.401 **
Unemployment rate 27.13 0.459 ** 45.01 0.548 **
Constant −714479.50 629.37 ** −563384.90 803.22 **

Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.

Table D.1. Unemployment probabilities for people older than 58 (Logit model).
Men Coef. Std. Err. Women Coef. Std. Err.
Coef. Std. Err. Coef. Std. Err.
Age 3.070 0.472 ** 0.675 0.386 *
Age Sq. −0.025 0.004 ** −0.006 0.003 *
Immigrant −0.574 0.062 ** −0.070 0.0780
Secondary studies −0.279 0.063 ** −0.146 0.066 **
University studies −1.704 0.395 * −1.516 0.476 **
Experience 0.011 0.006 * −0.018 0.005 **
Experience Sq. −0.000 0.000 * 0.000 0.000 **
Non-manual work −0.555 0.064 ** −0.208 0.050 **
Qualified work 0.439 0.385 0.437 0.460
Unemployment rate 0.080 0.004 ** 0.0230 0.004 **
Constant −94.45 14.599 ** −21.153 12.001 *

*Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.

Table E.1. Retirement model 2005–2014 vs. 2005–2010.
Men Model 1 Model 2 Women Model 1 Model 2
Age 21.22 ** 43.08 ** 0.829 ** 77.87 **
Age Sq. 0.976 ** 0.972 ** – 0.968 **
Secondary studies 0.973 1.050 ** 0.857 1.142 **
University studies 1.152 ** 1.062 ** 0.932 1.271 **
First year retired 11.22 ** 2.042 ** 7.252 ** 2.545 **
Unemployed 0.656 ** 0.313 ** 0.692 ** 0.000
Unemployment benefit 0.156 ** 1.000 * 0.213 ** 1.000
Wage (1000 € change) 0.992 ** 0.994 ** 0.992 ** 0.994 **
PV(a) 0.953 ** 0.998 ** 0.899 ** 0.993 **
Time to max. pension 0.995 * 0.930 ** 1.002 0.968
Age at max. pension 1.000 * 1.000 1.000 1.000
Replacement rate 1.074 ** 1.146 ** 1.131 ** 1.199
Minimum pension 1.124 * 0.926 ** 1.438 ** 0.862 **
Months since eligible(log) 1.329 ** 2.627 ** 1.476 ** 3.182 **
Unemployment rate 1.012 ** 0.986 ** 1.012 * 0.991
Constant 5454.00 ** 0.000 ** 6453.00 ** 0.000 **

Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.

Difference with respect to maximum pension, 1,000 € change.

Table E.2. Inclusion of disability.
Men Model 1 Model 2 Women Model 1 Model 2
Disability degree – – 0.993 ** – – 0.995
Dummy disability – – 0.751 ** – – 0.841
Age 43.08 ** 43.31 77.87 ** 78.16 **
Age Sq. 0.972 ** 0.972 ** 0.968 ** 0.968 **
Secondary studies 1.050 ** 1.049 * 1.142 ** 1.143 **
University studies 1.062 ** 1.061 * 1.271 ** 1.270 **
First year retired 2.042 ** 2.042 ** 2.545 ** 2.542 **
Unemployed 0.313 ** 0.315 ** 0.000 0.000
Unemployment benefit 1.000 * 1.000 * 1.000 1.000
Wage (1000 € change) 0.993 ** 0.993 ** 0.992 ** 0.992 **
PV(a) 0.994 ** 0.994 ** 0.993 ** 0.993 **
Time to max. pension 0.930 ** 0.930 ** 0.968 0.968
Age at max. pension 1.000 1.000 1.000 1.000
Replacement rate 1.146 ** 1.147 ** 1.199 1.200
Minimum pension 0.926 ** 0.926 ** 0.862 ** 0.862 **
Months since eligible(log) 2.627 ** 2.629 ** 3.182 ** 3.180 **
Unemployment rate 0.986 ** 0.986 ** 0.991 * 0.991
Constant 0.000 ** 0.000 ** 0.000 ** 0.000 **

Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.

Difference with respect to maximum pension, 1,000 € change.

Table E.3. Inclusion of marriage/partnership.
Men Model 1 Model 2 Women Model 1 Model 2
Married/partnership – – 1.078 ** – – 1.005
Age 43.08 ** 44.05 ** 77.87 ** 70.42 **
Age Sq. 0.972 ** 0.972 ** 0.968 ** 0.968 **
Secondary studiesa 1.050 ** 1.061 ** 1.142 ** 1.131 **
University studies 1.062 ** 1.072 * 1.271 ** 1.265 **
First year retired 2.042 ** 2.059 ** 2.545 ** 2.415 **
Unemployed 0.313 ** 0.357 * 0.000 0.000
Unemployment benefit 1.000 * 1.000 * 1.000 1.000
Wage (100 € change) 0.994 ** 0.994 ** 0.993 ** 0.993 **
PV(a) 1.000 ** 1.000 ** 0.999 ** 0.999 **
Time to max. pension 0.930 ** 0.932 ** 0.968 0.984
Age at max. pension 0.993 0.994 0.994 0.994
Replacement rate 1.146 ** 1.140 ** 1.199 1.210
Minimum pension 0.926 ** 0.941 ** 0.862 ** 0.880 **
Months since eligible(log) 2.627 ** 2.716 ** 3.182 ** 3.058 **
Unemployment rate 0.986 ** 0.987 ** 0.991 0.999
Constant 0.000 ** 0.000 ** 0.000 ** 0.000 **

Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.

Difference with respect to maximum pension, 1,000 € change.

Table F.1. Retirement decision (Probit model).
Men Coef. Std. Err. Women Coef. Std. Err.
Age 3.594 0.144 ** 3.554 0.183 **
Age Sq. −0.027 0.001 ** −0.027 0.001 **
Secondary studies 0.041 0.021 * 0.152 0.028 **
University studies −0.015 0.026 0.318 0.055 **
First year retired 0.834 0.055 ** 0.918 0.069 **
Unemployed −0.937 0.364 **
Unemployment benefit −0.000 0.000 *
Wage (100 € change) −0.000 0.000 ** −0.001 0.000 **
PV −0.000 0.000 ** −0.001 0.000 **
Time to max. pension −0.100 0.012 ** −0.064 0.017 **
Replacement rate 0.384 0.073 ** 0.267 0.133 **
Minimum pension −0.065 0.021 ** −0.163 0.027 **
Months since eligible(log) 0.928 0.064 ** 0.904 0.077 **
Unemployment rate −0.019 0.005 ** −0.016 0.007 **
Constant −118.203 4.682 ** −118.817 5.989 **

Base category: less than secondary.

**Significant at 5º% level.

*Significant at 10º% level.