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The Sustainability and Adequacy of Pensions in Belgium

Joint assessments with MIDAS and MALTESE

Gijs Dekkers

2nd Tecnical meeting on the Use of Administrative Data and Modelling Techniques in the Monitoring of Pension Systems

EC and the Spanish Presidency, Madrid, 23 March 2010.

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Overview of this presentation

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I. General Introduction to MALTESE and MIDAS

II. The financial consequences of social policy:

two examples considered

I. An increase of the minimum right per career year

with 17% from October 2006 on

II. An increase of the Garanteed Income for the

Elderly (inkomensgarantie voor ouderen)

with 13,7% from December 2006 on

III. Work in PROGRESS and conclusions

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I. General Introduction to MALTESE and MIDAS

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MIDAS and MALTESE: institutional context

Study Committee on Demographic

Ageing

MALTESE

MIDAS

Technical support

Assumptions and hypotheses AlignmentOn projections

FINANCIALSUSTAINABILITYOF THE PENSIONSYSTEM

ADEQUACY OF PENSIONS

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THE MALTESE SYSTEM: MODEL FOR ANALYSIS OF LONG TERMEVOLUTION OF SOCIAL EXPENDITURE

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SOCIAL BENEFITS EXPENDITURE BY SCHEME AND REGIME

SOCIODEMOGRAPHICSCENARIO

DEMOGRAPHICSCENARIO

SOCIODEMOGRAPHIC PROJECTIONBy age group and gender

MACROECONOMIC SCENARIO

MACROECONOMIC PROJECTION:Employment, GDP, wages, …

DEMOGRAPHICPROJECTIONBy age group and gender

Number of beneficiaries

Average amount

HEALTH CARE EXPENDITURES

SOCIAL SECURITY ACCOUNTSRevenues, expenditures, balance, debtSOCIAL POLICY

SCENARIO

BUDGETARY POLICY SCENARIO

GENERAL GOVERNMENT ACCOUNTSRevenues, expenditures, balance, debt

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MIDAS - Microsimulation for the Development of Adequacy and Sustainability

Starting dataset: the Panel Dataset on Belgian Households PSBH of 2002

DEMOGRAPHICMODULE

LABOUR MARKETMODULE

PENSION & BENEFITS MODULE

t+1

Mortality, fertility, education,‘marriage market’Employment, public and privatesector, civil servants, unemployment,disability, CELS, retirementHours of work per month, months of work per year,earnings per hour

1st pillar pension benefits- employees’ scheme- civil servants scheme- independent workers’ schemeCELS benefitsdisability pension benefitsunemployment benefitswelfare benefits

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Consistency between MALTESE and MIDAS

1. Both MIDAS and MALTESE include all policy measures introduced up to 2009, including the increases by 17 en 13.7% of the minimum right per career year and the Guaranteed Income of the Elderly between 2006 and 2007.

2. Both models apply the parameters of the Generational pact :• wage ceiling and minimum right per career year in employees’

pension benefit : 1.25%• indexation pension benefits employees’ scheme and independents’

scheme wage-related : 0.50%• indexation minimum (pension) benefits: 1%

3. Midas aligns to MALTESE, and hence adopts its projections

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The application of alignment in MIDAS

State alignment• fertility, mortality (to gender, age, simulation year)• employment rate (to gender, age category, simulation year)• unemployment rate(idem)• rate of independent workers (idem)• rate of civil servants (idem)• disability rate (idem)• CELS rate (idem)

Monetary alignment• gross wages (to gender and simulation year)

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Replacement ratio- base scenario

4050

6070

80

2000 2010 2020 2030 2040 2050 2060year

Men Women

HP filter - Men HP filter - Women

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Poverty risk to status – base scenario

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2030

4050

2000 2010 2020 2030 2040 2050 2060Year

Total population Workers

Retirees Unemployed

Disabled

Source: MIDAS

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Income inequality (Gini) to status – base scenario

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.2.2

5.3

.35

2000 2010 2020 2030 2040 2050 2060Year

Total population Workers

Retirees

Source: MIDAS

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II. The financial consequences of social policy: two examples considered

1. An increase of the minimum right per career yearwith 17% from October 2006 on

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What does the minimum right per career year do?

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The budgetary impact of the increase of the minimum right per career year (% GDP)

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The impact of the increase of the Minimum Right per Career Year on poverty risk to status (%)

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1015

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2000 2010 2020 2030 2040 2050 2060Year

Total population - reference scenario Total population

Workers - reference scenario Workers

Retirees - reference scenario Retirees

Source: MIDAS

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The impact of the increase of the Minimum Right per Career Year on poverty risk to status (%)poverty line 70% of median equivalent income

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010

2030

40

2000 2010 2020 2030 2040 2050 2060Year

Total population - Reference scenario Total population

Workers - Reference scenario Workers

Retirees - Reference scenario Retirees

Source: MIDAS

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2. An increase of the Garanteed Income for the Elderly (InkomensGarantie voor Ouderen - IGO)

with 13,7% from December 2006 on

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II. The financial consequences of social policy: two examples considered

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The budgetary impact of an increase of the IGO with 13.7%

Increase of 0.045% GDP

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An increase of the IGO with 13.7%: what determines the budgetary impact?

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The impact of the increase of the Guaranteed Income of the Elderly on the Poverty risk to status (%)

05

1015

20

2000 2010 2020 2030 2040 2050 2060Year

Total population - reference scenario Total population

Workers - reference scenario Workers

Retirees - reference scenario Retirees

Source: MIDAS

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III. Work in PROGRESS and conclusions

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1. Consistency of MIDAS with MALTESE

2. extentions of MIDAS

1. Gross-net trajectory

2. The 2nd pension pillar

3. Replacing the starting dataset by administrative data

4. Besides the PROGRESS deliverables, some extentions and further developments

are necessary: net immigration, weights, further monetary alignment, …

The goals of the PROGRESS project SIPEBE

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Conclusions

1. Thanks to PROGRESS and the collaboration with the Federal Public Service

Social Security, the FPB is well under way to develop MIDAS into a tool for

the assessment of pensions in conjunction with MALTESE

2. This presentation uses the capacity of joint analysis with both models to…

Simulate the impact of the 17% increase of the minimum right per career year

Expenditures increased by 0.07% GDP in total, but impact will be gradual

No impact on poverty risk with 60% poverty line

Long-run impact of poverty risk with 70% poverty line

Simulate the impact of the 13.7% increase of the Guaranteed Income of the

elderly

Expenditures increased by 0.045% GDP in total, roughly equally spread over all years

Considerable and nearly immediate impact on poverty risk with 60% poverty line

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Consistency between MALTESE and MIDAS: alignment in MIDAS

Several procedures that aim to make the model reproduce one or more exogenous aggregates.

state alignment monetary alignment

State 1

State 2Persoon i

Ui < Pi

Pi=logit-1(βX)

Ui < 1-Pi

‘standard’ Monte Carlo simulation Aligned simulation to target x%

State 1

State 2Rangorde 1...n

Eerste xN personen

Rangordei=logit-1(βX+εi)

Overige (100-x)N personenRun the modelyi=βXi + ui (2001, t)

Sum to aggregate ; derive aggregate growth rate gY

Monetary alignment target growth rate gxt

Derive corrected growth rates

Run the modelyi=βXi + ui (2001)

Apply corrected growth rate -> t

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