Microsimulation and the formulation of policy: A case study of targeting in the European Union

Over the past 20 years, microsimulation models have come to play an important role in policy analysis, identifying gainers and losers, and characterising the effect on incentives. A natural development of national models is a Europe-wide tax benefit model. The present paper reports results from such a prototype European tax-benefit microsimulation model. The model is used to examine the distributional impact of a simulated policy reform: the introduction of a European Minimum Pension (EMP). In particular it asks how far such a policy is 'targeted' on the poorest pensioners. The analysis shows that the composition of the bottom of the European income distribution is sensitive to assumptions about the comparability of incomes across countries and between households of different types. We conclude that the formulation of policy for the protection of Europe’s poorest people requires an appreciation, not only of the composition and location of this group, but also of the assumptions that have been used to identify it.