On using dynamic microsimulation models to assess the consequences of the AWG projections and hypotheses on pension adequacy: Simulation results for Belgium, Sweden and Hungary [ REP_SIMUBESEHU0515 - 27/05/2015]

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Since a couple of decades, the pension policy of member states is a focal point of attention on the European level. Securing financial sustainability by the AWG requires a prospective vision on ageing, labour market developments and social policy. But a sensible assessment of financial sustainability cannot do without taking into account the prospect ive development of pension adequacy. The SPC does this through prospective theoretical replacement rates and benefit ratios. However, prospective values of the key ISG indicators, such as the risk of poverty rate or the Gini are not available.

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Authors

Gijs Dekkers (A), Raphael Desmet (A), Ádám Rézmovits (A), Olle Sundberg (A), Krisztián Tóth (A)

A : Author, C : Contributor

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Reports

The report presents the work carried out by the Federal Planning Bureau in its fields of expertise, at the request of the authorities, partners. 

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Central Administration of National Pension Insurance

It was decided in the SPC WG AGE that Belgium, Hungary and Sweden would use their dynamic microsimulation models to simulate possible developments of pension adequacy, while taking into account the projections and hypotheses of the AWG.

In Belgium, gross public pension expenditure increase by 3.5% of GDP between 2013 and 2060, while the poverty risk as well as inequality among pensioners would decrease. In Sweden, the assumption of an unchanged retirement age results in projected gross public pension spending as a percentage of GDP to decrease by 1.5 percentage points, while lowering the benefit ratio and causes the risk of poverty among the pensioners to increase. Finally, pension expenditures in Hungary are projected to decline by 0.1%-points. This is mainly the result of the shorter service years, which themselves are the results of the great transition in Hungary, and which cause
the poverty risk of pensioners to increase.

The results of this paper not only show the consequences of the AWG hypotheses and projections on prospective poverty risks, but also demonstrate the potential value of using dynamic microsimulation on the EU level. Finally, the simulation results on the various scenarios for Belgium and Sweden also show that increasing the employment of older workers not only reduces pension expenditures as a share of GDP, but also reduces the poverty risk among the elderly. So although they are two sides of the same coin, careful policy design allows to jointly reinforce sustainability and adequacy.