EU-PROGRESS Project MiDLAS 2013-2015 Kick-off Meeting Gijs Dekkers Federal Planning Bureau,

1. Recent Developments in Dynamic Microsimulation Modeling for Policy Support: • an application to Belgium EU-PROGRESS Project MiDLAS 2013-2015 Kick-off Meeting Gijs Dekkers Federal Planning Bureau, CESO, K U Leuven And CEPS/INSTEAD Raphaël Desmet Federal Planning Bureau

2. Recent Developments in Dynamic Microsimulation modeling for policy support • Microsimulation? What microsimulation? • The interdependence of adequacy and sustainability • A long-standing collaboration process, cumulating in… • … LIAM2 • The microsimulation model MIDAS : ready to tango • An application: what is the impact of recent pension reform on the prospective development of the AROP in Belgium? • Conclusions

3. Microsimulation, what microsimulation? • The essential function of (dynamic/static) microsimulation models... ...is the imputation of (prospective/alternative) microdata n i

4. A classfication of microsimulation models Microsimulation models Static Dynamic Static ageing Dynamic ageing Cross-sectional ageing Longitudinal ageing

5. Recent developments in microsimulation • Microsimulation is now recognized as a valuable tool in research and policy assessment in various parts of the world • Scientific research on and with microsimulation is increasingly popular IMA, IJM • Static ageing is the most popular in both applied and academic research, though dynamic-ageing models are and remain the more popular • Alignment is an accepted range of methods ensuring complementarity between macro-models and dynamic micro-models • Multi-country models or frameworks EUROMOD, UNU-WIDER, MIDAS Genesis, LIAM2, ModGen

6. A long-standing collaboration process, cumulating in… • May 2005-May 2008: Research project AIM; 6th framework programme of the European Commission. FPB (Belgium), DIW (Germany), ISAE (Italy): first-generation MIDAS, using LIAM • December 1st, 2009 – November, 30th 2011. PROGRESS project MiDaL FPB (Belgium), CEPS/INSTEAD, and IGSS, Luxembourg. The preparation of administrative data in Luxembourg and the development of LIAM2 by the FPB • January 1st, 2010 – August, 31th 2010. Convention Redis. FPB (Belgium), CEPS/INSTEAD, and IGSS, Luxembourg. First-generation prospective model for Luxembourg, based on MIDAS_BE and using LIAM

7. LIAM2 • Tool for the development of dynamic microsimulation models with dynamic cross-sectional ageing. • ≠ a microsimulation model (<> Midas) • Simulation framework that allows for comprehensive modelling and various simulation techniques • Prospective / Retrospective simulation • Work in progress … • You get it for free!

8. A simple simulation file in LIAM2

9. But of course, LIAM2 can do much more… • Stochastic simulation • Deterministic changes • functions • Modelling on multiple object levels • Links between objects of various levels • Proportional alignment, including hard and soft take and leave conditions • Alignment over muliple levels (a.k.aChenard’s algorithm) • The creation, removal and cloning of objects • Parameters, arrays, macro’s • Importing models in other models • Output handling • Extensive debugging possibilities

10. LIAM2 bundled in Notepad model/YAML Interactive console

11. Table 1: performance of MIDAS_BE using LIAM2 - simulation run from 2002 to 2060. Other information • LIAM2 is currently used for dynamic microsimulation in various countries Belgium, Hungary, Japan, NZL, Luxembourg, UK, France, the Netherlands • And various subjects Pensions, health care, taxes and contributions, demographics

12. In Belgium, LIAM2 is being used for the development of • The dynamic microsimulation model MIDAS an acronym for ‘Microsimulation for the Development of Adequacy and Sustainability’ • Based on a sample of administrative data

13. MIDAS: an overview • The dynamic microsimulation model MIDAS an acronym for ‘Microsimulation for the Development of Adequacy and Sustainability’ • Starting dataset: individuals, grouped in households (survey, administrative data) • Individuals pass through all stages of life: birth, marriage, divorce, children, widowhood, death • Individuals find a job, lose it, become eligible to a social security benefit (or not), build up a pension... • Individuals enter into retirement and receive a pension benefit based on their previous career • MIDAS simulates: pensions, unemployment, disability schemes, welfare, gross-net trajectory.

14. A key characteristic of MIDAS is its consistency with the semi-aggregate model MALTESE MALTESE (macro) MIDAS (micro) ‘Channels of consistency’ of MIDAS with MALTESE State alignment Monetary alignment Joint social hypotheses

15. The MALTESE macro-budgetary model Population projection by age and gender Socio-economic breakdown by age (groups) and gender Macroeconomic projection Social expenditures by branch Health care expenditure (acute and long-term) Number of beneficiaries Average benefits Social expenditures or budgetarycost of ageing Public sub-sectorsaccounts, public debt

16. The microsimulation model MIDAS : ready to dance • Alignment of state variables: • Procedure to have the model respect or ‘mimic’ exogenous aggregates while respecting individual probabilities in the occurrence of the event • Behavioral equation determining the probability of the transition • Individuals are ranked depending on the obtained probability (from the highest to the lowest) • The number of selected individuals reproduces targeted aggregates • Mortality, fertility, employment, unemployment, self-employment, public sector employment, civil servants, disabled, CELS beneficiaries • Monetary alignment or ‘amount alignment’: • Proportional adjustment of first-run values of earnings to match exogenous macroeconomic productivity growth rates • Uprating • Of social security benefits

17. The social and budgetary impacts of recent social security reform in Belgium EU- PROGRESS Project MIDLAS Kick-off Meeting Luxembourg, September23, 2013 Raphaël Desmet Federal Planning Bureau, Joint work with GIJS DEKKERS, NICOLE FASQUELLE and SASKIA WEEMAES

18. The social and budgetary impacts of recent social security reform in Belgium • The pension system in Belgium • Recent social security reform in Belgium • Budgetary impact of social security reform • Social impact of social security reform • Conclusions

19. The pension system in Belgium • Three pillars • Separate PAYG schemes for employees in the private and public sectors and self-employed. • Earnings related scheme with redistributive elements (ceiling, minima, maxima, minimum right per career year, assimilated periods, …) • Means-tested old-age guaranteed minimum income (GRAPA) • Official retirement age is 65, but retirement is possible from 60 on (62 after reform)

20. Pension reform • Eligibility conditions for early retirement: - Age condition gradually increases from 60 to 62 in 2016 - Career condition gradually increases from 35 to 40 years in 2015 Adaptation of the rules for calculating the benefit - Some assimilated periods of unemployment and early-retirement are now valued at the minimum right per career year - The early-retirement penalty for self-employed is reduced and abandoned for those of 63 and older, or who have a long career. - The pension benefit of civil servants is now based on the last 10 years of the career

21. Unemployment/Conventional Early Leavers’ scheme • Unemployment Increased digression of unemployment - 1st period: compensation rate slightly increases - 2nd period: duration limited for cohabiting with dependants and singles and reduced for cohabiting - 3rd period: minimum benefit for cohabiting with dependants and singles and lump sum benefit for cohabiting Age condition for seniority supplement: - 50 to 55 years old, with a career of minimum 20 years • Conventional Early Leavers’ Scheme (CELS) Career condition increases from 35 to 40 years Part-time CELS abandoned

22. Budgetary impacts of social security reform Table 4 Budgetary costs of ageing: base scenario of the Study Committee of Ageing (with reform) and impact of the reforms (difference between projection with and without reform), October 2012 % of GDP Source: High Council of Finance, Study Committee of Ageing, Yearly Report 2012 a. Public expenditure, inclusive long-term care. b. Inclusive time credit and career breaks

23. Social Impacts of reform • Risk of poverty rate of retirees, in percent

24. Figure 3 : Risk of poverty rate of retirees by gender – Comparison between a scenario with structural reforms and a scenario without structural reforms, in percent Social Impacts of reform Risk of poverty rate of retirees by gender, in percent

25. Social Impacts of reform Development of the average net retirement benefits of pensioners, by gender (on the left) and of the average net equivalent income of pensioners, by gender (on the right), %

26. Social Impacts of reform Risk of poverty rate of unemployed computed at 70% of the equivalent income, by gender (men on the left and women on the right)

27. Conclusions This paper assesses the sustainability and adequacy impact of recent social security reform in Belgium Microsimulation model aligned on a macro budgetary model As a result of this reform, the budgetary costs of ageing are reduced by 0.3%-point GDP, evenly distributed between pensions, unemployment and CELS/UCA. The risk of poverty of pensioners decreases as a result of the reform. This effect is faster for men than for women The poverty risk for (male!) unemployed increases considerably