The Impact of the Retirement Decision and Demographics on Pension Sustainability: A Dynamic Microsimulation Analysis

Abstract

This paper investigates how retirement decisions, in interaction with demographic changes, impact on pension system sustainability. To do so, we introduce behaviour into a dynamic microsimulation model applied to the Spanish case. Specifically, the retirement decision is modelled using a reduced-form survival model that provides information on retirement hazards, which are then used to calculate times to retirement within the microsimulation model. This model allows us to account for behavioural responses. For example, the behavioural reaction to the 2011 reform improves pension system sustainability, despite individuals opting to retire later to obtain higher benefits. The positive effect (increase in contributions and reduction in time spent in retirement) is greater than the negative effect (increase in pension levels). Additionally, the model allows us to show how the positive effects of the education transition and higher rates of female and older worker participation contribute to reducing the negative impact of population ageing.