Dynamic Microsimulation Models Using to Analyze Retirement Systems Reforms: An Essay of Synthesis

Dynamic microsimulation models applied to economics were first introduced in the United States at the end of the 1960’s. Since the 1980’s, they have been rapidly developing due to the increase in computational capabilities and to the availability of longitudinal data. Dynamic microsimulation provides a tool for analysing nonlinear pension systems by simulating individual trajectories of heterogeneous economic agents. Hence, this method highly improves the understanding of pension reforms, the evaluation of pensioners’ rights and intra- as well as inter-generational redistributions. Moreover, it takes into account methods and results from other kinds of analyses, such as behavioural micro-econometrics. This article sets out a synthesis of the achievements of dynamic microsimulation studies of pension systems. The first section draws up a typology of useful methods in the field of pension systems studies. In the second section, a technical assessment of the method is carried out. Various sources of errors in the calculation of individual trajectories and in the determination of aggregated results are examined. Two simple numerical examples illustrate some properties of stochastic simulations. Our analysis recommends better knowledge of the statistical properties of dynamic microsimulation. It favours setting up databases which directly answer the needs of dynamic microsimulation. Finally, the third section reviews an extensive range of dynamic microsimulation models from across OECD countries, and sums up the achievements of the French INSEE model, DESTINIE.