A micro simulation model of demographic development and households' economic behavior in Italy

The relationship between the demographic structure and the saving rate of a society is the reflection of the aggregation of the behaviour of heterogeneous households, differing from one another in the type of living arrangements and in the characteristics of their members. In order to contribute to the understanding of this relationship, we construct a dynamic micro model capable of simulating the demographic development of a population, including the creation, destruction, dimension and various other important characteristics of households and their members. The demographic model is then combined with a specification of the processes generating income, social security wealth, retirement and consumption behaviour of households, and applied to a data set derived from survey data on the Italian household sector. Simulations of the model are used to study the evolution of aggregate income, saving and asset accumulation over the period 1994-2100. If fertility and mortality assumptions of recent official projections are adopted and marriage and divorce rates maintained at current levels, the dramatic ageing of the population and the marked decline in the share of population living in traditional households would lead, other things being equal, to a substantial decline in the aggregate saving rate. However, the reduction in the number of children per household and, above all, the decline in the ratio of social security wealth of households to disposable income as the effects of the recently introduced reforms begin to be felt act as offsetting factors. As a result, the aggregate saving rate increases over the initial 30 years of the simulation and moderately decreases thereafter, stabilizing slightly above the original level. Implications of changes in a number of key assumptions regarding the demographic evolution, productivity growth and individual behavioural responses are also analyzed.