Demographic Ageing and the Portuguese Pension System: Evidence from a Dynamic Microsimulation Model

Amílcar Moreira, Instituto de Ciências Sociais, Universidade de Lisboa
Luís Manso, Instituto de Ciências Sociais, Universidade de Lisboa
Rui Nicola, University of Southampton
Alda B. Azevedo, Instituto de Ciências Sociais, Universidade de Lisboa

In this paper we examine the relationship between the financial and social sustainability of the Portuguese Pension system between 2015 and 2060 and test the impact of reform scenarios using a cross-sectional, closed, discrete dynamic microsimulation model - DYNAPOR.

Preliminary results from the baseline scenario show that the Portuguese population will continue to decline and age. Excluding the migratory flow, the population is expected drop by 25% and the old-age dependency ratio is expected to increase from 31 individuals aged 65 and over for every 100 persons in working age in 2015 to 70 in 2060. Consequently, maintaining the current eligibility and qualifying conditions for old-age, survivors and disability pensions, the percentage of pensioners in the Portuguese population is expected to increase from 26% in 2015 to 37% in 2060. Nevertheless, the projected economic growth will contribute to keep pension expenditure relatively stable, below 14% of the Gross Domestic Product (in current prices).

It is expected that the results of DYNAPOR will strengthen the evidence-base upon which the debate on the balance between financial and social sustainability of the Portuguese Pension system runs.


THIS IS A WORK IN PROGRESS. PLEASE DO NOT QUOTE WITHOUT AUTHOR’S CONSENT

In this paper we examine the relationship between the financial and social sustainability of the Portuguese Pension system between 2015 and 2060 and test the impact of reform scenarios using a cross-sectional, closed, discrete dynamic microsimulation model - DYNAPOR.

The DYNAPOR model is a cross-sectional, closed, discrete dynamic microsimulation model that runs on a random sample of the Portuguese population, extracted from the European Union Statistics on Income and Living Conditions survey (EU-SILC), 2013 round. It was initially developed from the Microsimulation for the Development of Adequacy and Sustainability model (MIDAS_BE), the dynamic microsimulation model built by the Federal Planning Bureau to assess the adequacy of pensions in Belgium (see Dekkers, Desmet and De Vil, 2010).

The DYNAPOR model is designed with four modules: demographic, labour market, pensions and taxation. In each simulation run (one year), individuals go through the modules and face a probability that an event can take place. In the demographic module, the model simulates the most relevant demographic events (death, having a child, family formation/dissolution, education). Then, in the labour market module, individuals get their labour market status updated (employee in the private sector, employee in the public sector, civil servant, self-employed, unemployed, retired, disabled, inactive). For individuals assigned to be working, the model computes the number of hours worked and the earnings from employment/self-employment. Next, individuals enter the pensions module where the model updates the contributory record and checks the eligibility and qualifying conditions to a pension and computes the respective amounts. Lastly, in the taxation module, the model computes the income tax liability and determines both gross and disposable income. The assignment of events to individuals is done through one of three methods: deterministic behavioural equations (e.g. to simulate the take-up of pension benefits), probabilistic behavioural equations (e.g. to compute the number of hours worked and the wages), and alignment by sorting (e.g. to assign demographic events and labour market status).

Preliminary results from the baseline scenario show that the Portuguese population will continue to decline and age. Excluding the migratory flow, the population is expected drop by 25% and the old-age dependency ratio is expected to increase from 31 individuals aged 65 and over for every 100 persons in working age in 2015 to 70 in 2060. Consequently, maintaining the current eligibility and qualifying conditions for old-age, survivors and disability pensions, the percentage of pensioners in the Portuguese population is expected to increase from 26% in 2015 to 37% in 2060. Nevertheless, the projected economic growth will contribute to keep pension expenditure relatively stable, below 14% of the Gross Domestic Product (in current prices).

Based on the results of the DYNAPOR model, we will examine the relationship between financial and social sustainability of the Portuguese Pension system and test the impact of reform scenarios. It is expected that the results of DYNAPOR will strengthen the evidence-base upon which the debate on the balance between financial and social sustainability of the Portuguese Pension system runs.

References

Dekkers, G., Desmet, R. and De Vil, G. (2010). “The long-term adequacy of the Belgian public pension system: An analysis based on the MIDAS model”. Federal Planning Bureau, Planning and Working Papers, 10-10.

Presented in Session 1127: Ageing and Intergenerational Relations