A Microsimulation Model for Sustainability and Detailed Adequacy Analysis of the Retirement Pension System

The sustainability and adequacy of pension systems are central to public policy debates in aging societies. This paper introduces a novel microsimulation model with probabilistic behavior to assess these dual challenges in the Spanish pension system. The model employs a mixed-projection method, integrating a macro approach—using economic and demographic aggregates from official sources such as the Spanish Statistics Office (INE) and Eurostat—with a micro approach based on the Continuous Sample of Working Lives (MCVL) dataset from Spanish Social Security. This framework enables individual-level projections of key labor market variables, including work time, salary, and initial pensions, under diverse reform scenarios. The results demonstrate the model’s ability to predict initial pensions with high accuracy, providing detailed insights into adequacy by age, gender, and income levels, as well as distributional measures such as density functions and quantiles. Sustainability findings indicate that pension expenditures are projected to stabilize at 13.9% of Gross Domestic Product (GDP) by 2050. The proposed model provides a robust and versatile tool for policymakers, offering a comprehensive evaluation of the long-term impacts of pension reforms on both system sustainability and individual adequacy.