Exploring the potential of microsimulation for the study of poverty, health, and social

security in the developing world. The MicroHGC model

IMA 2011

Martin Spielauer (IIASA)

Landis MacKellar (IIASA)

Organization

- Context- The MicroHGC Model

- General outline- Implementation

- Illustrative results- Life course income- Distribution of returns- Pension income & poverty

- Conclusions & Discussion

Context

- Technical Assistance project of the Asian Development Bank: introduction of the New Pension System (NPS) in India

- Examples from:

Landis MacKellar, Martin Spielauer (forthcoming 2011) NPS and the Individual Saver: a Microsimulation Analysis. In: Implementing Pension Reforms for Financial Inclusion: Policy Issues and Options for India; Asian Development Bank

- MicroHGC: generic version, developed at IIASA- Tool for research & capacity building- MS for study of poverty, health & social security

Context

- Developing world setting- Less detailed data- Fundamental policy choices - High inequality (no mean/representative agent)

- MS complementing stylized macro accounting models- Adding flexibility & distributions; reproducing macro- Transparent, simple to understand and operate

- Evolvement of project:- actuarial macro model- Idea to add calculations for some “typical cases”- Cases, cohorts, population..- … reproduction of macro model with added information

Context – Indian NPS

- The NPS is a version of the public sector pension plan for “unorganized sector” = 89% of population

- Voluntary, minimum contribution of 500Rs (10$) / month- Enhanced investment choices (investment strategy & 6

funds)- Non-withdrawable- EET tax regime: contribution & accrued earnings exempt,

Taxable at withdrawal (ongoing discussion)- Low fees compared to existing private plans

- 2$PPP/day poverty line; 1.25US$ nominal = 60Rs- Median male work income ~3000 Rs/month (60US$)

Model – General Outline

Behaviour Macro Micro

Fertility UN projection, urban / rural

# births + list of typical familiesOpen population, case based

Mortality Urban / rural, 1% decrease per year

identical

Migration 1% rural -> urban identical

LMP scenarios + duration in state

Wages Average, fixed growth scenarios

+ distribution: log-normal Gini 0.36+ mobility

Sickness, disability Scenarios

Pension saving Fixed % + boundary condition: 2$PPP, minimum contribution 500Rs, normal & max saving rate

NPS Fixed interest,Stylized fees, enrolment scenarios, annuitized at 60

+ Detailed fee structure+ Rule-based enrolment+ inheritance

Model – Implementation

- Implemented in the generic microsimulation language Modgen developed and maintained at Statistics Canada

Illustration: Life course income, 1992 cohort

0

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202224262830323436384042444648505254565860626466687072747678808284868890

Rs.

Age

Life-Course Income and Pension by Type for the 1992 Birth Cohort; Male, 6th Earning Decile

Household pension income

Existence Minimum

Household income net of NPS contributions

Individual pension income

Illustration: Life course income, 2002 cohort

0

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202224262830323436384042444648505254565860626466687072747678808284868890

Rs.

Age

Life-Course Income and Pension by Type for the 2002 Birth Cohort; Male, 6th Earning Decile

Household pension income

Existence Minimum

Household income net of NPS contributions

Individual pension income

Illustration: Distribution of IRR, 1992 cohort

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0%

10%

20%

30%

40%

50%

60%

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80%

90%

100%

1st D

ecile

4th

Dec

ile

7th

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ile

10th

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ile

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ecile

4th

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ile

7th

Dec

ile

10th

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ile

1st D

ecile

4th

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ile

7th

Dec

ile

10th

Dec

ile

Female . Male . All

IRR

Perc

enta

ge o

f pop

ulati

onIRR of Pension Savings by Initial Income Decile, 1992 Birth Cohort:

Never enough income to join plan

All savings consumed up by fees

Negative IRR

Positive IRR

Average positive IRR

Illustration: Pensions by earning deciles

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20000

1960

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2012

2016

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2028

2032

1962

1966

1970

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1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

2026

2030

Female Male

Real

(201

0) R

s.

Average individual Pensions by Initial Earning Decile and Year of Birth

1st Decile

2nd Decile

3rd Decile

4th Decile

5th Decile

6th Decile

7th Decile

8th Decile

9th Decile

10th Decile

All

Illustration: Pensions and poverty

0

0.1

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0.9

1

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. Male

Population age 65 with Household Pension Income above Poverty Line by Initial Income Decile and Year of Birth

1st Decile

2nd Decile

3rd Decile

4th Decile

5th Decile

6th Decile

7th Decile

8th Decile

9th Decile

10th Decile

All

Illustration: Pensions and health expenditures

0%

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100%

[199

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Population age 65 with Household Pension Income above Poverty Line by Initial Income Decile and Year of Birth: Base vs. Health Expenditure Scenario

Illustration: Pensions and fees

0%

10%

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100%

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93)

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Population age 65 with Household Pension Income above Poverty Line by Initial Income Decile and Year of Birth: Base vs. No Fees Scenario

1. Decile, Base cenario

1. Decile, No Fees Scenario

Conclusions

- Application side- Illustration of limits of private saving for old age income

security- Enhancements

- Education- Generic tool, capacity building

- Questions concerning microsimulation:- Do such simple stylized models make sense (or leave

this type of modeling to macro community?)- Are developing countries a good application area of

microsimulation- Best strategy for improving MS models for this type of

application?