Micro simulations on the effects of ageing-related policy measures

In the Netherlands, like in most OECD-countries, the ageing of the population endangers the sustainability of public finances. In this paper a dynamic micro simulation model is used for calculating the financial and economic implications of the ageing problem and the policy measures considered. The model uses micro datasets of all Dutch pensions and pension entitlements. The retirement decision is modelled by using an option value approach. First, the paper discusses the baseline scenario of unchanged policies. The micro simulation results differ from previous macro CGE results. The state pension costs rise less sharply than the number of pensioners. Also the micro simulation model is used to analyse the redistributive character of the Dutch pension system, both through differences in pension entitlements and through differences in life expectancy, for different subgroups. The retirement decision is analysed with an option value based behavioural model. Secondly, the paper discusses the effects of five policy measures aimed at reducing the state pension costs and the sustainability gap: abolishment of the partner allowance (a measure that is already decided about), raising the retirement age from 65 to 67Â years of age, introduction of a flat rate state pension at the same level as the current pension for partners of a couple, raising the taxation of wealthier pensioners by abolishing their tax exemption and introduction of a flexible retirement window with a high accrual to reward later retirement. For each measure, the budgetary effects, labour participation effects and redistributive effects are quantified and assessed.