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APPENDIX
D
Major Aspects of DYNASIM2 and PRISM
DYNASIM2 and PRISM are dynamic microsimulation models that have been
used to analyze a range of retirement-income-related policy proposals.] The two
models are much broader than the cell-based Social Security actuarial cost model
(see Appendix C): they simulate not only Social Security taxes and benefits, but
also employer pension and Individual Retirement Account (IRA) contributions
and benefits, Supplemental Security Income (SSI) eligibility and benefits, and
federal income taxes. PRISM has a long-term care financing module that simu-
lates long-term care utilization and financing for the elderly. The two models
take some account of asset income (e.g., dividends and savings interest) but do
not simulate wealthy
Because they use dynamic microsimulation techniques, both DYNASIM2
and PRISM are able to provide highly disaggregated outputs for each year of a
projection period (e.g., for population groups categorized by level of earnings
and employment status). They can simulate complex policy provisions and inter-
actions. For example, for Social Security, they have been used to simulate
options that the cell-based Social Security actuarial cost model could not handle
(e.g., provisions to credit homemaker spouses with a share of the employed
spouse's earnings).
Both models can be obtained by others and are documented to some extent.
1DYNASIM2 has been used for other types of policy analysis as well, such as the effects on
welfare program costs of alternative rates of teenage childbearing.
2The PRISM long-term care financing module does treat assets to some extent.
199
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ASSESSING POLICIES FOR RETIREMENT INCOME
The documentation for DYNASIM2 is more complete than that for PRISM. (For
DYNASIM2, see Johnson and Zedlewski, 1982; Johnson, Wertheimer, and
Zedlewski, 1983; Zedlewski, 1990; for PRISM, see Kennell and Shells, 1986,
1990; Rivlin and Wiener, 1988.) The accessibility of the models in practice is
limited: they were designed well over a decade ago for mainframe (or minicom-
puter), batch-oriented computing environments, and they lack user-friendly de-
sign features. However, both models were recently moved to a personal comput-
ing platform (the PRISM long-term care financing submodel has operated for
some years on personal computers). They have had relatively little formal valida-
tion, although some older validation studies for DYNASIM2 are available (e.g.,
Haveman and Lacker, 1984; Hendricks and Holden, 1976; Wertheimer et al.,
1986~.
DYNASIM2 and PRISM illustrate the power and richness of the micro-
simulation approach to policy projections. They also illustrate the limitations of
existing models for addressing many current retirement-income-related policy
issues. Their limitations are partly a function of their design, which was opti-
mized for an older generation of computing technology. Even with a newer
design, however, the lack of key data and behavioral parameters for such impor-
tant elements as savings decisions of individuals and benefit offering decisions of
employers would limit their utility. As we note throughout this report, significant
improvements in microsimulation modeling capabilities require improvements in
data and research knowledge.
This appendix briefly reviews how DYNASIM2 and PRISM work (drawing
on Ross, 1991) and comments on key limitations involving their ability to simu-
late behavioral responses to policy changes and to simulate the effects on workers
and retirees of employer benefit and labor demand decisions (drawing on Burtless,
1989; Ross, 1991; and a review of the pension simulation components of the two
models by panel member Olivia Mitchell).
HOW THE MODELS WORK
Both DYNASIM2 and PRISM take an initial database and age the records for-
ward for every year by means of a dynamic approach. These starting databases
are exact-match files that contain records for the members of households from the
Current Population Survey (CPS) March income supplement matched with their
personal earnings histories from Social Security Administration (SSA) adminis-
trative records. For DYNASIM2, the starting database is the March 1973 CPS-
SSA exact-match file. For PRISM, the starting database is the March 1978 CPS-
SSA exact-match file, which, in turn, is matched with the March 1979 CPS and
the May 1979 CPS pension supplement.3 The earnings histories in these files are
Because there is only partial overlap between the March 1978, March 1979, and May 1979 CPS
samples, the PRISM database has considerably fewer records than the DYNASIM2 database.
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MAJOR ASPECTS OF DYNASIM2 AND PRISM
201
essential for computing Social Security payroll contributions and benefit entitle-
ments; they are also useful for simulating employer pension contributions and
benefits.
Then, for every year after the base year, DYNASIM2 and PRISM age the
characteristics of the records in the file; they not only age each person by 1 year,
but also, on the basis of probabilities, simulate whether or not each person will
go to school, marry, have a child, divorce, die, change employment status, change
jobs, participate in a pension plan, retire, and so on. Both models use outside
aggregates, such as the Social Security Office of the Actuary's population projec-
tions, to control the simulation results for each projected year.
The essence of the models is the creation of longitudinal histories for each
person in the original cross-sectional database. These histories are created in
DYNASIM2 and PRISM by a set of modules that simulate each event in the
following sequence: death, birth, marriage, divorce, labor force participation,
unemployment. Starting with the first year, the modules run in turn for each
individual. Then year two is simulated, starting with the first individual, from
death through unemployment, and ending with the last individual. After the
longitudinal histories are created, policy simulations (e.g., of tax liabilities) are
run on the records.
Given this sequence of events, demographic events can influence labor force
events occurring in the same year (and demographic events occurring earlier in
the sequence can affect those simulated later in the sequence), while events
happening later in the sequence affect events in the following year. Events or
characteristics that are simulated after the longitudinal histories are created are
affected by those histories (e.g., SSI or Social Security benefits), but they cannot
affect the sequence of demographic and labor force events. Therefore, the deci-
sion to include certain events in the simulation of longitudinal histories is an
important one. Table D-1 lists the events included in the simulation of longitudi-
nal histories and the events that are simulated using the synthetic histories for the
two models. Tables D-2 and D-3 provide additional information on the determi-
nants of major events simulated by DYNASIM2 and PRISM, respectively.
Originally, both DYNASIM2 and PRISM modeled birth, death, marriage,
divorce, disability, and labor force events, and DYNASIM2 also modeled educa-
tion, migration, and leaving home. The objective in developing DYNASIM2 was
to be able to simulate a range of demographic and economic events for many
different policy purposes. Thus, for example, the model simulates the education
of children and young adults, including those born during the simulation and
added to the file, because a labor force simulation might find these children as
prime-age workers and a simulation with a very long time horizon might find
these children as retirees. PRISM, in contrast, was designed to simulate incomes
and long-term care utilization of the elderly through the year 2025. Given this
time horizon, the model originally did not attempt to simulate life histories for
people who were younger than age 20 in the base year (1979) or for those who
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ASSESSING POLICIES FOR RETIREMENT INCOME
TABLE D-1 Basic Features of DYNASIM2 and PRISM
Feature DYNASIM2 PRISM
Input Data
Simulation Base Year 1972
Information in
Simulation Database
Exact match of March 1973
CPS and Social Security
Exact match of March 1978
CPS and Social Security
earnings records earnings records; also
matched with March and
May 1979 CPS
Retirement Plan Provisions
databases
1979
Demographic 1973 1978- 1979
Income 1972 1977- 1978
Employment 1972- 1973 1977- 1979
Quarters of
Social Security
Coverage 1937- 1972 1937- 1977
Social Security
Taxable Earnings 1951 - 1972 1951 - 1977
Pension
Characteristics 1979
Events Simulated to Create
Longitudinal Histories
Demographic Death Death
Birth Birth
Marriage Marriage
Divorce Divorce
Disability Disability
Education level Education level
Leaving home
Migration
Labor Force Participation Annual hours of work
Annual hours of Hourly wage
participation
Hourly wage
Whether unemployed
Proportion of labor force
hours unemployed
Job and Pension
Characteristics
Job change
Industry
Pension coverage
Pension plan assignment
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MAJOR ASPECTS OF DYNASIM2 AND PRISM
TABLE D-1 Continued
203
Feature DYNASIM2 PRISM
Retirement and Benefit
Acceptance
Individual Retirement
Account (IRA)
Simulations Based on Longitudinal
Histories
Job and Pension
Characteristics
Employer Pension
Social Security
Individual Retirement
Account (IRA)
Retirement
Supplemental
Security Income
Taxes
Job change
Industry
Pension coverage
Plan participation
Pension eligibility
Type of plan
Benefit formula
Plan constants
Benefit computation
Retirement benefit
eligibility
Retirement benefit
computation
Disability benefit
Spouse benefit
Children's benefit
Participation
Accumulations
Distribution
Whether leave job
Whether accept new job
Eligibility
Benefits
Participation
Federal income tax
Social Security payroll tax
Pension acceptance
Social Security acceptance
Adoption
Contributions
Benefit computation
Retirement benefit
eligibility
Retirement benefit
computation
Disability benefit
Spouse benefit
Children's benefit
Distribution
Eligibility
Benefits
Participation
Federal income tax
Social Security payroll tax
State income tax
aDeveloped by the original contractor for PRISM, ICE Incorporated.
NOTE: Table does not include the PRISM Long-Term Care Financing Model.
SOURCE: Ross (l991:Table 1). The data for DYNASIM2 come from Johnson, Wertheimer, and
Zedlewski (1983) and Johnson and Zedlewski (1982); the data for PRISM come from Kennell and
Shells (1986).
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ASSESSING POLICIES FOR RETIREMENT INCOME
TABLE D-2 Determinants of Major Events Simulated by DYNASIM2
Event or Characteristic
Variables Used to Determine Event
Simulation of Longitudinal Histories
Demographic Event
Death
Married Women 45-64
All Others
Birth
Multiple Birth
Sex of Newborn
Marriage
Age 18-29
Other Ages or Ever Married
Mate Matching
Leaving Homea
Divorce
Education
Mobility
Disability
Onset
Recovery
Labor Force Events
Labor Force Participation
Hours in the Labor Force
Age, race, sex, marital status,
education, number of children
Age, race, sex, marital status,
education
Age, marital status, number of
children, race, education
Race
Race
Age, race, sex, previous marital
status, income, education, region,
weeks worked, hourly wage, asset
income, welfare, unemployment
compensation
Age, race, sex, previous marital status
Difference in age, difference in
education
Age, race, sex
Distribution over time of expected
divorces for this marriage cohort,
age at marriage, education,
previous marital status, presence
of young children, weeks worked,
wages
Race, sex, age, years at current school
level, parents' education
Number of years married, size of
family, age and sex of head,
education of head, race, region,
size of metropolitan statistical
area (MSA)
Age, race, sex, marital status
Age, race, sex, marital status,
education
Age, race, sex, education, South,
disability, marital status, student,
children, spouse earnings
Age, transfer income, expected wage,
disability, marital status, children
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MAJOR ASPECTS OF DYNASIM2 AND PRISM
TABLE D-2 Continued
205
Event or Characteristic
Variables Used to Determine Event
Wage Rate
Unemployment
Job Characteristics and Pension Plans
Job Change
Industry of New Job
Pension Coverage on New Job
Pension Plan Participation
Type of Pension Coverage
Pension Eligibility and Benefits
Retirement Eligibility
Vesting
Benefit Formula
Benefit Plan Constants
Individual Retirement Accounts
Plan Participation
Retirementb
Probability of Leaving Job
Probability of Taking New Job
Race, sex, age, South, disability,
marital status, education, student
Age, sex, race, education, marital
status, South, disability, children
Simulation of Jobs, Pensions, and Retirement,
Using Longitudinal Histories
Age, sex, tenure on current job,
industry
Sex, education, previous industry
Sex, industry, earnings level
Age, tenure on job, full- or part-
time status, sex
Industry
Age, industry, years of service,
type of pension
Industry
Industry and type of pension coverage
Benefit formula, industry, type of
pension coverage
Sex, earnings
Age, sex, disability, marital status,
pension eligibility and amounts,
Social Security eligibility and
amounts, wage, earnings
Age, disability, marital status,
pension eligibility and amounts,
Social Security eligibility and
amounts, imputed wage
aLeaving home for reasons other than marriage, birth of a child, divorce, or death.
bThe retirement module's choice of retirement age for an individual overrides whatever pattern of
labor force participation may have been modeled earlier in the simulation of the individual's longitu-
dinal history.
SOURCE: Ross (l991:Table 2). The data come from Johnson, Wertheimer, and Zedlewski (1983)
and Johnson and Zedlewski (1982).
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ASSESSING POLICIES FOR RETIREMENT INCOME
TABLE D-3 Determinants of Major Events Simulated by PRISM
Event or Characteristic
Variables Used to Determine Event
Simulation of Longitudinal Histories
Demographic Events
Death
Disability
Onset
Recovery
Divorce
Marriage
Mate Matching
Birth
Labor Force Events
Hours Worked per Year
Wage Rate
Job Change
Industry
Pension Characteristics
Pension Coverage
Pension Plan Assignment
Retirement
Pension Acceptance
Social Security Acceptance
Individual Retirement Accounts
Adoption
Contributions
Disability status, age, sex,
years of disability
Age, sex
Age, sex, years of disability
Age of husband and wife
Age, sex, previous marital status
Age of male, age of female
Marital status, age, number of
children, employment status last year
Hours last year, age, sex, marital
status, education, composite of hours
in previous 3 years, female with
young children, female divorced or
widowed this year, receiving pension
or Social Security income
Age, sex, whether changed job this
year, whether unemployed this year
Hours worked, age, years on job
Age, education, previous industry,
full- or part-time status
Age, industry, full- or part-time
status, wage rate
Industry, multi- or single employer
plan in 1979, hourly or salaried status
Age, sex (conditional on eligibility)
Age, sex (conditional on eligibility)
Age, family earnings, pension coverage
Sex, marital status, family earnings
SOURCE: Ross (l991:Table 3). The data come from Kennell and Shells (1986).
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MAJOR ASPECTS OF DYNASIM2 AND PRISM
207
were born during the simulations. In 1993, PRISM was modified to simulate
educational attainment and life histories for all people alive in the base year.
PENSION COMPONENTS
DYNASIM2
DYNASIM was designed in the 1970s and updated to DYNASIM2 in the early
1980s as a microdemographic model focused primarily on family formation and
dissolution and active worker employment, and only secondarily on retirement.
DYNASIM2's labor market segment is contained in the Family and Earnings
History Model. It is a recursive system in which demographic characteristics are
first simulated for each person for each year. The last of these is a disability
probability, which is determined as a function of age, race, sex, marital status,
and education. Disability status, in turn, is then used to determine earnings and
labor force participation. Earnings, labor force participation, disability, and hours
variables are determined for all years of the simulation before pension accruals or
benefits (or taxes) are determined and before retirement outcomes are set.
The Jobs and Benefits History segment of DYNASIM2 takes as input the
results from the first-stage simulation just described and inputs several additional
outcomes, including retirement age, Social Security and SSI benefits (if entitled),
IRA account accumulations, and job history variables. People are also given a
pension coverage probability, which depends on sex, industry, and earnings level;
if covered, a plan participation outcome is determined, which depends on age,
tenure, sex, and full- or part-time status. These participation and coverage prob-
abilities are taken from 1979 CPS data. People assigned positive pension partici-
pation are then assigned one of four pension plan types based solely on industry
of employment: single-employer defined benefit, single-employer defined con-
tribution, multi-employer defined benefit, or multi-employer defined contribu-
tion. There appears to be no provision for a worker to have more than one
pension plan from a given employer, although multiple mans have become Suite
widespread in recent years.
The actual determination of pension benefits is done in an Employer Pension
Module subroutine attached to the Jobs and Benefits History segment of
DYNASIM2. This module is used whenever a termination benefit must be
computed for a covered vested worker or when a worker is simulated to retire in
order to evaluate retirement benefits. The kernel of the Employer Pension Mod-
ule is that it determines the parameters of each worker's pension plan, including
the early, normal, and special early retirement ages, probability of full vesting
after 10 years of service, defined benefit formula type, and specified constant
terms within the defined benefit formula. Maximum service and minimum ben-
efit amounts are also set.
Each of these parameters is assigned on a randomized basis. Factors used to
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ASSESSING POLICIES FOR RETIREMENT INCOME
assign the parameters are age, years of service, and industry, drawing from a
number of different data sets where available. Pension eligibility requirements
for normal and early retirement are based on a 1974 defined benefit plan database
of the Bureau of Labor Statistics (BLS). Vesting assignments are determined
solely on the basis of industry, using a 1976 data set. Benefit formulas for
defined benefit plan participants are assigned annual contribution rates of 7 per-
cent and a nominal rate of interest on their account balances of 7 percent. There
are some arbitrary assumptions in the Employer Pension Module. For example,
the documentation notes that pre-retirement survivor protection probabilities are
arbitrarily set at .02, and the probability of joint and survivor benefits at .75 for
men and .25 for women.
Pensions are also considered in the Retirement Model. Once the simulated
worker is old enough, the probability of leaving a job and taking a new one is
computed as a function of age, sex, disability, earnings, pension and Social
Security wealth, and changes in pension and Social Security wealth if retirement
is delayed a year. This model differs dramatically from the other job change
models in DYNASIM2 in that many more economic variables are allowed to
enter on the right-hand side as explanatory factors. One problem with this model
is that the pension and Social Security wealth terms assume that people die with
certainty at age 85, rather than using a more actuarially correct declining survival
table.
DYNASIM2 is a useful model for many policy purposes, but it is limited in
a number of ways for retirement income policy analysis in the 1 990s and beyond.
Although DYNASIM2 could be useful in a partial equilibrium simulation of
some retirement income policies, such as the effects of Social Security benefit
changes on retirement behavior, doing so requires the assumption that nothing
else changes a questionable assumption for many policy scenarios. Thus, for
instance, simulation of changes in payroll taxes would have to assume no labor
demand response, since no employer behavior is included in the model. Changes
in the taxability of retirement income could be simulated, but the structure of the
model would not permit these tax changes to influence earnings, labor supply, or
retirement.
Although the model can be used to examine how exogenous changes in
pension benefit parameters might influence retirement, it cannot do a good job of
examining the effects of changes in nondiscrimination laws or the pension tax
treatment of employer contributions, since employers' decisions about pension
offerings and the consequences for employees are not included. Similarly, it
cannot be used to examine the effect of mandated pensions, since no demand-side
behavior is built in there is no provision for job losses that might result or for
depressed earnings. DYNASIM2 is primarily a labor supply model, and thus no
labor demand consequences can be examined regarding effects of changes in
payroll taxes, effects of privatizing a piece of Social Security, etc. Finally, since
only a few "hypothetical" pension plans are included in the model and their
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MAJOR ASPECTS OF DYNASIM2 AND PRISM
209
parameters are not constrained to be internally consistent with each other or for
the employees they cover, there is not much room for estimating how changes in
specific rules (e.g., nondiscrimination rules) would affect employees through the
effects on employers' compensation decisions or their willingness to offer pen-
sions at all.
PRISM
PRISM is a microdemographic model designed in the early 1980s to simulate
retirement income from public and private sources. The model simulates earn-
ings, employment, retirement, and benefits from employer pensions, Social Secu-
rity, and SSI. It also generates retiree health care coverage outcomes. It does not
model asset accumulation or savings in general, though it does have an IRA
savings segment. The PRISM model was augmented in the mid-1980s to include
a long-term-care financing module. This module assigns asset portfolios to people
when they reach age 65 and then in each year of the projection makes a simple
adjustment of housing asset values by an assumed inflation rate and of nonhousing
asset values by an assumed constant rate of dissaving.
The structure of the model is recursive. The people in the starting database
are "aged" by using background information on such characteristics as earnings
histories, pension coverage, and employment. The paths of demographic out-
comes are determined first, which in turn feed into the labor force segment.
Labor supply outcomes (hours of work, job and industry assignment, pension
coverage, date of pension benefit acceptance) are determined next, as a function
of such exogenously specified factors as pension plan provisions. Wage growth
is also determined at this step, independently of benefit accruals and taxes. (Dis-
ability, job change, and entry to the labor force do not depend on benefits or pay.)
Next, retiree income levels are specified, including Social Security and pension
benefits, using as input the labor force outcomes. Finally, long-term-care out-
comes are simulated.
The PRISM pension module includes more than 400 different pension plans
in comparison to a handful of generic types in DYNASIM2. Pension coverage is
determined in the labor force module. Pension plan coverage is allocated on the
basis of 1979 and 1983 CPS coverage rates, assigned as a function of industry,
age, wage, and full- or part-time status. Plan type is assigned on the basis of very
tight assignment criteria: industry, firm size, Social Security coverage, union,
multi- or single-employer status, and hourly or salary status. The model also
accounts for the person's 1979 CPS pension plan type, vesting, contributions, and
participation in a supplemental plan as a way to benchmark starting values.
Retirement benefits depend on pension benefit formulas, cost-of-living adjust-
ments, and pro- as well as postretirement survivors' options. The probability of
accepting pension benefits depends on sex and age, but not on benefit amounts.
The probability of participating in a savings or thrift plan depends on wages and
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ASSESSING POLICIES FOR RETIREMENT INCOME
employer contributions, and employee contributions are always assumed to be
the maximum allowed by the plan. A probability distribution estimated from
CPS data is used to determine whether a lump-sum distribution is rolled over.
(Most small distributions are not rolled over in the model.) All defined contribu-
tion accounts are assumed to be annuitized at the individual annuity rate rather
than the group annuity rate. Workers are assumed to receive benefits when they
retire from all vested defined benefit plans from all prior jobs (although retirees
must actually apply for deferred vested benefits from jobs they left before retire-
ment, and some proportion may not do so).
Many pension parameters are drawn from a Retirement Plan Provisions data-
base. Information on a total of 475 plans was collected for 325 plan sponsors, so
that in many cases both a primary and a secondary plan was obtained. Private
single-employer and multi-employer plans and nonprofit plans came from a strati-
fied random sampling of a 1981 filing of Form 5500 reports. Data for the public
employer plans came from a random sample of a 1982 listing of public plans with
more than 200 participants. Self-employed plans were also added to the sample,
and weights were calculated. The 1981 information was updated in 1983; how-
ever, the database does not include 401(k) plans, so, in simulations, savings and
thrift plans are assumed to grow to the requisite numbers.
Most pension parameters in the model are taken as fixed numbers, rather
than being developed endogenously. Thus, industry pension coverage rates are
constraints, and pension plan provisions are assumed not to change over time.
Normal, early, and disability retirement formulas are given, as are Social Security
integration rules and employer and employee contribution amounts. Employees
are assumed to contribute 5 percent of their earnings in profit-sharing plans and
to contribute the maximum possible amount to defined contribution plans that
require employee money.
The PRISM model is a second-generation approach to what DYNASIM was
seeking to accomplish with regard to pension policy simulation. It is still limited,
however, for today's pension and retirement income policy needs. One strength
of the model is its richness of detail on pensions, both private and public. The
Retirement Plan Provisions database with its several hundred pension plans,
including their lengthy vector of plan parameters, builds into this model a more
realistic degree of cross-sectional variability than the DYNASIM2 format. How-
ever, the database has not been updated since 1983, and it is essentially static.
Presumably, the sample weights could be altered to allow for changes in the
distribution of types of employers and type of plans, but there is no provision for
interaction between labor supply and labor demand behavior that could alter the
distribution of plan offerings. Also, there is no feedback of pension plan provi-
sions and changes in them to workers' labor supply decisions or wage growth.
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MAJOR ASPECTS OF DYNASIM2 AND PRISM
2
LIMITATIONS
Both DYNASIM2 and PRISM are limited by the old age of their starting data-
bases. Neither model has switched to a newer initial database because in the face
of confidentiality concerns and resource constraints, government agencies have
not been willing to prepare new exact-match files, although this situation may be
changing (see discussion in Chapter 4~. The consequence is that both models
must simulate more and more years of historical data before they can begin
projecting into the future. Aggregate information, such as employment rates and
total payroll contributions, can keep the simulations in line with actual historical
experience for a handful of key variables for years up to the present, but there is
no way to ensure that the models accurately reflect the interrelationships among
all of the important variables for those years.
In addition, the models have not been revised to incorporate newer research
findings about the underlying behaviors. Many of the key transition probabili-
ties for example, estimates of labor force participation and retirement are
based on old analytical studies (e.g., in DYNASIM2, on the 1969-1979 Retire-
ment History Survey and early years of the Panel Study of Income Dynamics)
and use overly simplistic functional forms. As an example, the labor force
simulation in PRISM is based on a simple Markov probability model of transi-
tions between categories of hours of work estimated from matched files of the
March 1978 and 1979 CPS. This functional form, over time, will not preserve the
characteristics of the distribution of hours worked in the population. Such a
formulation captures limited information about previous work patterns, so that it
will not properly project the work choices of individuals at the extremes of the
distribution people who rarely or always worked.
With regard to employer-provided pensions, the models do not incorporate
more recent knowledge about trends in pension plan coverage, such as the growth
in defined contribution plans. Similarly, neither model reflects well the trend
toward increasing heterogeneity of labor force behavior, in which an individual
may "retire" from a succession of jobs. Also, many pension-related assumptions
in both models allow little or no variation over time or across workers: for
example, assuming fixed contribution rates for defined benefit plans, that em-
ployees always contribute the maximum to defined contribution plans, or that
workers receive all of the benefits from defined benefit plans from all prior jobs
that the model's pension rules say they are entitled to when they retire.
A reason that neither model has been revised to update key transition prob-
abilities or to incorporate more appropriate functional forms that reflect newer
understanding of behavior has to do with the cost and time constraints imposed
by their mainframe-oriented design. Because the models are not easy to modify,
it is not in the modelers' interest to invest in redesign until substantial funding is
available and there are clear research findings about appropriate functional forms
and parameter estimates. In addition, since the 1983 Social Security amend
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ASSESSING POLICIES FOR RETIREMENT INCOME
meets, there has been relatively little demand for retirement-income-related mod-
eling until now. Moreover, the decade of the 1980s saw important changes in
labor markets and employee benefits that have made it difficult to determine the
best professional judgment about key parameters to incorporate in models.
Another limitation of the models is their lack of a ready capability to esti-
mate the feedback effects of policy changes on behavior, also because of their
design. That design separates the construction of longitudinal year-by-year de-
mographic and economic "histories" for each person in the database from policy
simulations as such. Because creating longitudinal histories was expensive on a
mainframe, the practice has been to generate one set of histories (or a few sets
under different reasonable assumptions) and then run a large number of program
simulations on that longitudinal file. As noted above, events or characteristics
that are simulated after the creation of the longitudinal histories are affected by
those histories but cannot in turn affect the sequence of demographic and labor
force events. For example, in both models, changes in the Social Security system
cannot lead to compensating changes in labor supply over an individual's work
life unless the longitudinal histories are re-created with a new set of labor supply
equations incorporating the expected response. Although it would be possible for
other models to simulate the second-round effects of policy changes that are
initially simulated by DYNASIM2 or PRISM, neither model has a ready capabil-
ity to link with second-round effects models.
Finally, the models allow very few employee decisions to be endogenously
determined by pension or tax parameters. Thus, the pension parameters are
treated as exogenous to the simulation, and retirement plans are more or less
"dropped" on workers, with few or no consequences for their decisions to take a
job, change jobs, retire, save, or consume. Ideally, models to evaluate retirement
income policy would take pensions as endogenously determined by interactions
between employees and employers, in the context of regulatory and overall eco-
nomic constraints. Because neither DYNASIM2 and PRISM makes pensions
endogenous, these two models do not afford the opportunity to investigate how
entire classes of policy changes might affect pension sponsorship and participa-
tion, pension accumulation and investments, and, finally, pension decumulation.
The broader missing piece is employers' demand for labor, including the trade-
offs between benefits and wages and employment as well as pay decisions.
Representative terms from entire chapter:
marital status
