Toward Improved Modeling of Retirement Income Policies Interim Report (1995) / Chapter Skim
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MODELS
MODELS
Pages 17-27
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From page 17... ...
(Estimation of hehavioral re.cnon.c~ ~nr1 noli~.v Tim clan rim ~1z~t~ can the It metier anytime ~ -rat ret J -~ u~ ~ -__ I_ I_ I -- aim J The distinction between analytical and policy models is not hard and fast. For example, analytical models that are developed to understand various types of behavior may incorporate policy variables (e.g., levels of expected Social Security or employer pension benefits)
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From page 18... ...
models estimate the second-round behavioral effects of proposed policy changes on prices and quantities in markets, taking into account feedback effects between supply and demand. For example, an increase in marginal tax rates may decrease work effort, thereby leading to reduced labor supply, thereby leading to higher wage rates and increased labor supply until a new equilibrium is reached.
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From page 19... ...
the model output includes information on the uncertainty of the model estimates and their sensitivity to key assumptions; and (3) the model incorporates best current professional judgment about the underlying behavior (e.g., best judgment about the appropriate functional form and parameter values with which to estimate changes in private savings in response to changes in Social Security or employer pensions)
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From page 20... ...
structure or specification. For example, one would use sensitivity analysis to investigate the effects of a particular equation for simulating the labor supply response to a change in the retirement age for Social Security or employer pensions.
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From page 21... ...
Thus, because of the long time horizon, the Social Security actuary routinely presents high-cost, intermediate, and low-cost scenarios for the balance in the Social Security trust funds under current law. However, there is no comparable record of regularly projecting the Tong-term funding status of employer pensions, even though this source of retirement income may be more uncertain than Social Security (see Burtless, 1993; and Schieber and Shoven, 1993, who develop such a projection for defined benefit and defined contribution plans)
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From page 22... ...
(For example, changes designed to increase employer pension coverage, if they also increase employer costs, could lead employers to opt out of pension plans and hence reduce coverage in the longer run.) Modeling of feedback effects is quite difficult, both operationally and because of the uncertainty of behavioral responses to policy changes.
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From page 23... ...
that can address broader policy questions for example, the effects of tax policy changes on contributions to employer pension plans in the aggregate.5 Our overall conclusions about existing models are mixed. Some models appear to have useful features for some kinds of applications; however, on balance, our assessment is that existing models are not adequate to inform the retirement income policy debate fully.
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From page 24... ...
The SSA model develops projections of payroll taxes and benefits for age-sex groups that take account of demographic and economic trends for such variables as life expectancy, retirement age, and worker productivity. Each year the model is run to estimate the balance in the trust funds over the next 75 years, assuming that current law continues unchanged.
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From page 25... ...
aggregate contributions paid into the system.7 The SSA model can simulate a range of policy options for Social Security, such as changes in the payroll tax rate, the payroll tax base, the benefit calculation formula, the earnings test, the cost-of-living adjustment, and the retirement age. However, such policy options as meanstesting benefits and increasing individual income tax rates on benefits are beyond the model's scope because they require information about other sources of income (e.g., private pension and asset income)
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From page 26... ...
The earnings histories in these files are essential for computing Social Security payroll contributions and benefit entitlements; they are also useful for simulating employer pension contributions and benefits. Then, for every year subsequent to the base year, DYNASIM2 and PRISM age the characteristics of the records in the file; they not only increment each person's age by 1 year but, on the basis of transition probabilities, also simulate whether or not people will go to school, marry, have a child, divorce, die, change employment status, change jobs, participate in a pension plan, retire, and so on.
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From page 27... ...
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, neither model relates individuals' decisions about labor supply and savings to expectations for example, expectations about likely future policy changes or their own longevity.
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Key Terms
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