Income heterogeneity and pension forecasts - extension of a pension simulation model and selected applications

So far, simulation models of the German pension insurance (GRV) have taken into account the heterogeneity of the insured population only to a limited extent. In particular, income heterogeneity has not been taken into account at all. In this paper, the pension simulation model “MEA-PENSIM” is extended by introducing different income categories and selected applications include the consideration of income-specific life expectancies, income-dependent replacement rates and inflation-indexation of public pensions after the first year of retirement. The income differentiation is based on administrative data. It is shown that taking account of income-specific differences (e.g. with regard to retirement behavior) increases the quality of the model. Moreover, the more differentiated view provides interesting additional insights, especially on the replacement rates of the lower income groups. The extended model is particularly suited to assess reforms that reduce the equivalence principle by inducing more redistribution. More generally, the model can simulate the distributional effects of pension reforms.