APPENDIX

A

Examples of Retirement-Income-Related Policy Models

MICROSIMULATION MODELS

CORSIM

Dynamic microsimulation model of people and households; projects life histories for people of all ages, year by year; first version developed in 1986-1988 as adaptation of DYNASIM2; rebuilt in 1989-1993; written in C language; operates on desktop PCs; being rewritten to also run on parallel-processing supercomputers. Processes modeled include fertility, immigration, mortality; first marriage, remarriage, divorce, custody of children, leaving home, educational level; weeks worked and earnings; employment-related transfer income, welfare-related transfer income, pension-related transfer income; FICA taxes, federal and state income taxes, property taxes, estate taxes; family earned income, family transfer income, family asset income; consumption, savings; home ownership, market value, mortgage debt; ownership of other assets, market value, debt; asset changes from savings, asset changes from appreciation, asset transfers at death, asset transfers at divorce, income from assets; smoking, alcohol, diabetes.

References: Caldwell (1993); Caldwell et al. (1993).

DYNASIM2 (Dynamic Simulation of Income Model)

Dynamic microsimulation model of people and households; projects life histories for people of all ages, year by year; first version completed in 1975; redesigned version completed in the early 1980s with elements of original DYNASIM, the PENSIM model developed by James Schulz to simulate private pension alternatives, and other features for analyzing retirement-income-related policy issues; written in FORTRAN; operates on mainframes and minicomputers; being rewritten to operate on desktop PCs. Processes modeled include death, birth, marriage, divorce, disability, leaving home, education level, migration; labor force participation, annual hours of participation, hourly wage, whether unemployed, proportion of labor force hours unemployed; job change, industry, pension coverage, plan participation; pension eligibility, type of plan, benefit formula, plan constants, benefit computation; Social Security retirement benefit eligibility, retirement benefit computation, disability benefit, spouse benefit,



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Toward Improved Modeling of Retirement Income Policies: Interim Report APPENDIX A Examples of Retirement-Income-Related Policy Models MICROSIMULATION MODELS CORSIM Dynamic microsimulation model of people and households; projects life histories for people of all ages, year by year; first version developed in 1986-1988 as adaptation of DYNASIM2; rebuilt in 1989-1993; written in C language; operates on desktop PCs; being rewritten to also run on parallel-processing supercomputers. Processes modeled include fertility, immigration, mortality; first marriage, remarriage, divorce, custody of children, leaving home, educational level; weeks worked and earnings; employment-related transfer income, welfare-related transfer income, pension-related transfer income; FICA taxes, federal and state income taxes, property taxes, estate taxes; family earned income, family transfer income, family asset income; consumption, savings; home ownership, market value, mortgage debt; ownership of other assets, market value, debt; asset changes from savings, asset changes from appreciation, asset transfers at death, asset transfers at divorce, income from assets; smoking, alcohol, diabetes. References: Caldwell (1993); Caldwell et al. (1993). DYNASIM2 (Dynamic Simulation of Income Model) Dynamic microsimulation model of people and households; projects life histories for people of all ages, year by year; first version completed in 1975; redesigned version completed in the early 1980s with elements of original DYNASIM, the PENSIM model developed by James Schulz to simulate private pension alternatives, and other features for analyzing retirement-income-related policy issues; written in FORTRAN; operates on mainframes and minicomputers; being rewritten to operate on desktop PCs. Processes modeled include death, birth, marriage, divorce, disability, leaving home, education level, migration; labor force participation, annual hours of participation, hourly wage, whether unemployed, proportion of labor force hours unemployed; job change, industry, pension coverage, plan participation; pension eligibility, type of plan, benefit formula, plan constants, benefit computation; Social Security retirement benefit eligibility, retirement benefit computation, disability benefit, spouse benefit,

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Toward Improved Modeling of Retirement Income Policies: Interim Report children's benefit; IRA participation, accumulations, distribution; whether retiring from job, whether accepting new job; SSI eligibility, benefits, participation; federal income taxes, Social Security payroll taxes. References: Johnson and Zedlewski (1982); Johnson et al. (1983); Zedlewski (1990). PIMS (Pension Insurance Management System) Dynamic microsimulation model of private employers with defined benefit pension plans that are insured by the PBGC; written in C language; operates on desktop PCs. The PIMS economy module generates future values of interest rates and equity return; the employer module generates values for each employer of asset-debt ratios, employment, and market-value equity, and then uses the economy and employer variables to compute a bankruptcy probability. Under development is a plan module to simulate changes in age-service matrices of plan participants, terminated vested employees, and retired employees and to simulate contributions, benefits, and liabilities. Reference: Holmer (1993). PRISM (Pension and Retirement Income Simulation Model) Dynamic microsimulation model of people and households; projects life histories for people ages 20 and older, year by year through 2025; developed in 1980 for the President's Commission on Pension Policy; long-term-care module added in 1986; written in FORTRAN; operates on mainframe computers (long-term-care module operates on desktop PCs). Processes modeled include death, birth, marriage, divorce, disability; annual hours of work, hourly wage; job change, industry, pension coverage, pension plan assignment; decision to retire and accept pension, decision to retire and accept Social Security; IRA adoption, contributions; employer pension benefit computation; Social Security retirement benefit eligibility, retirement benefit computation, disability benefit, spouse benefit, children's benefit; IRA distribution; SSI eligibility, benefits, participation; federal and state income taxes, Social Security payroll tax. References: Kennell and Sheils (1986, 1990). Treasury Individual Income Tax Simulation Model (OTA Model) Static microsimulation model of taxpayers and families; written in FORTRAN; operates on minicomputers; includes a two-stage static routine to update and project the database for a total of 10 years (the first stage applies growth rates on each dollar amount to reflect actual and projected per capita real growth and inflation; the second stage adjusts the weights of family heads to hit aggregate targets for different variables). Models federal and state income tax and Social Security payroll tax liabilities under current law and alternatives, based on samples of individual income tax returns filed with the IRS. Reference: Cilke et al. (1994).

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Toward Improved Modeling of Retirement Income Policies: Interim Report Wolf et al. Model for Simulating Life Histories of the Elderly [under development] Dynamic microsimulation model of people and households to be developed with funding from the National Institute on Aging; will initially develop longitudinal histories for people ages 48 and older in 1988; will focus on kinship networks and functional (disability) status; will project total income for each family but will not, at least initially, identify separate sources of income, such as pensions. Reference: Wolf et al. (1995). CELL-BASED MODELS AARP Solvency and Individual Return (SIR) Model Cell-based model of the Social Security system; develops year-by-year projections for 75-year period; uses the Social Security actuary 's intermediate demographic and economic assumptions for simulating the effects of changing the tax or benefit formulas for workers who retire at different times and with high, medium, or low wages over their work life; outputs include years for workers to recover contributions, ratio of benefits to contributions, OASDI trust fund reserves as a percentage of outgo. References: Cohen and Beedon (1994a, 1994b). Macroeconomic-Demographic Model (MDM) System of large cell-based models linked to a macroeconomic growth model; originally developed in 1979 for the President's Commission on Pension Policy and the National Institute on Aging to address interactions of Social Security and the private pension system; subsequently expanded to simulate the effects of population aging on the health care system. The cell-based models in the system pertain to population growth, the labor market, pension benefits, family formation, consumer expenditures, housing demand, health care expenditures, and health care benefits; the macroeconomic model includes two goods (investment and consumer goods) and two factor inputs (labor and capital services). Reference: Anderson (1990). Schieber and Shoven Model Cell-based model of the funding status of the private pension system; develops year-by-year projections for 75-year period of assets, benefits, contributions, investment income, net inflow (current and real), and total payroll for defined benefit and defined contribution plans, separately for private employer, state and local, and federal plans. Uses the Social Security actuary's projections of the population by age, sex, and work force participation for each year; distributes the work force into private, state and local, and federal employment by tenure and pension participation status; accounts for mortality, job leaving, job entrance, and job change; projects employer and employee contributions using the Social Security actuary's assumptions about real wage growth. Reference: Schieber and Shoven (1993).

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Toward Improved Modeling of Retirement Income Policies: Interim Report Social Security Actuarial Model Cell-based set of models of the funding status of the Social Security system; develops year-by-year projections for 75-year period of payroll taxes, investment income, and benefits for the retirement, survivors, disability, and other components of the Social Security system. Develops projections of the population by age and sex on the basis of assumptions about fertility, mortality, and net immigration; develops projections of labor force participation for men by 5-year age group and marital status and for women by 5-year age group, marital status, and presence of children; projects earnings and payroll tax contributions on the basis of assumptions about real wage growth; projects benefits on the basis of projected earnings and assumptions about retirement age; projects investment income on the basis of assumptions about interest rates. Typically, projections are developed for high-cost, intermediate, and low-cost scenarios. Reference: Board of Trustees [OASDI] (1995). SSASIM [under development] Cell-based stochastic model of the Social Security system designed for multiple runs with different random draws from distributions of input variables (e.g., fertility rates, mortality rates); operates on desktop PCs. Eventually the model will have at least nine input variables that are assumed to be stochastic: total fertility rate, net immigration flow, mortality decline rate, female labor force participation rate, male labor force participation rate, unemployment rate, productivity growth rate, real interest rate, and inflation rate. A population module has been implemented; planned modules include a labor market module, a business establishment module, a product market module, a capital market module, and a Social Security program (tax and benefit) module. Reference: Holmer (1995). INTERGENERATIONAL MODELS Aaron, Bosworth, and Burtless Model Computable general equilibrium model in which labor supply and private saving patterns are based on observed profiles and are assumed to be exogenous. Future labor supply patterns are based on the demographic projections of the Social Security actuary. Capital accumulation is derived from the identity relating saving and investment, and an assumed production function determines the relative returns to capital and labor. The model incorporates a detailed characterization of the Social Security system, which it was developed to analyze. Reference: Aaron et al. (1989). Auerbach and Kotlikoff Model Computable general equilibrium model with three sectors: household (with 75 overlapping 1-year generations), production, and government. For each sector, there is a system of nonlinear equations relating endogenous behavioral variables (e.g., consumption or labor supply) to predetermined economic variables and taste and technological parameters. Individual model components are fairly simple but the interactions are complex. By solving for the economy's

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Toward Improved Modeling of Retirement Income Policies: Interim Report general equilibrium transition path, the model simulates the major feedback effects between policy and demographic changes and changes in the time paths of wages, interest rates, labor supply, and the capital stock. The model has been used to address such issues as how much Social Security contribution rates must be increased to maintain current benefit levels; effects on national saving rates and real wages of changing population age structure; effects on international capital flows of changes in saving rates and real wages; effects on overall well-being of people in different generations of economic changes associated with demographic transition; effects on economic performance and generational welfare of reductions in Social Security benefits. Differs from the Aaron, Bosworth, and Burtless model in modeling household saving and labor supply behavior as endogenous, based on an optimizing life-cycle model and the assumption of perfect foresight. References: Auerbach and Kotlikoff (1987); Auerbach et al. (1983, 1989). Imrohoroglu, Huang, and Sargent Model Computable general equilibrium model; assumes households want to smooth consumption and insure against lifetime uncertainty but have access to restricted set of assets and risk-sharing arrangements; assumes households are identical when first formed but that luck makes their wealth and consumption diverge as they age; specifies preferences, technologies, information and demographic structures, and government policies in ways that permit rapid computation of decision rules; models the effects of transitions between Social Security policies (e.g., from an unfunded system to a fully funded system as in Chile). Differs from the Auerbach and Kotlikoff model in allowing households to face uncertainty about preferences, income, and lifespan. Reference: Imrohoroglu et al. (1994).