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The option value approach in MIDAS_BE. Some work in progress. Jean-Charles Wijnandts 1 and Raphaël Desmet 2 and Gijs Dekkers 3 1. University of Liège (student internship at the FPB) 2. Federal Planning Bureau 3. Federal Planning Bureau and Katholieke Universiteit Leuven.

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The option value approach in midas be

The option value approach in MIDAS_BE

Some work in progress

Jean-Charles Wijnandts1 and Raphaël Desmet2 and Gijs Dekkers3

1. University of Liège (student internship at the FPB)

2. Federal Planning Bureau

3. Federal Planning Bureau and KatholiekeUniversiteit Leuven

Paper presented at the Ministerodell'Economia e delleFinanze, Rome, February 15th, 2011


The option value approach in midas be some work in progress
The option value approach in MIDAS_BE: some work in progress

  • Overview of this presentation

    • A very short introduction to the option value approach

    • Why including the option value approach?

    • The current situation

    • How to include the option value approach in the alignment process?

    • Some very preliminary simulation results


The option value approach in midas be some work in progress1
The option value approach in MIDAS_BE: some work in progress

  • Overview of this presentation

    • A very short introduction to the option value approach

    • Why including the option value approach?

    • The current situation

    • How to include the option value approach in the alignment process?

    • Some very preliminary simulation results


A very short introduction to the option value approach
A very short introduction to the option value approach*

* Note the word “approach” here.


A very short introduction to the option value approach1
A very short introduction to the option value approach

The notion of actuarial neutrality involves setting the gains from postponing retirement by just one year against the associated losses


The option value approach in midas be some work in progress2
The option value approach in MIDAS_BE: some work in progress

  • Overview of this presentation

    • A very short introduction to the option value approach

    • Why including the option value approach?

    • The current situation

    • How to include the option value approach in the alignment process?

    • Some very preliminary simulation results


Why including the option value approach
Why including the option value approach?

  • The current version of MIDAS_Be has all kind of behavioural equations, but they lack any theoretical underpinning and have no explicit inclusion of retirement incentives.

  • The Belgian first-pillar employees’ pensions is highly actuarially non-neutral (Dekkers, IJM, 2007) and this affects the retirement decision (Dellis et al., in Gruber and Wise, 2004).

  • In the absence of an option value approach, the impact of any policy measure aiming to reduce actuarial imbalance on the retirement decision is likely to be underestimated by MIDAS.


The option value approach in midas be some work in progress3
The option value approach in MIDAS_BE: some work in progress

  • Overview of this presentation

    • A very short introduction to the option value approach

    • Why including the option value approach?

    • The current situation

    • How to include the option value approach in the alignment process?

    • Some very preliminary simulation results






The option value approach in midas be some work in progress4
The option value approach in MIDAS_BE: some work in progress

  • Overview of this presentation

    • A very short introduction to the option value approach

    • Why including the option value approach?

    • The current situation

    • How to include the option value approach in the alignment process?

    • Some very preliminary simulation results


How to include the option value approach in the alignment process
How to include the option value approach in the alignment process?

Alignment for people younger than 60

Implicit tax on working longer

Alignment for people between 60 and 64


The option value approach in midas be some work in progress5
The option value approach in MIDAS_BE: process?some work in progress

  • Overview of this presentation

    • A very short introduction to the option value approach

    • Why including the option value approach?

    • The current situation

    • How to include the option value approach in the alignment process?

    • Some very preliminary simulation results


Some very preliminary simulation results
Some very preliminary simulation results process?

  • Women have on average slightly higher implicit taxes than men

  • Men and women selected at an earlier stage to stop their activity have higher implicit taxes on average than people selected at a later stage.



Some very preliminary simulation results2
Some very preliminary simulation results process?

The general trend is a strong increase of the market withdrawals at age 60 in scenario 2 at the expense of other ages between 61 and 64 years old




Conclusions
Conclusions process?

  • This variant of MIDAS_BE applies the implicit tax to set the ranking in the alignment of older workers

  • Men and women selected at an earlier stage to stop their activity have higher implicit taxes on average than people selected at a later stage.

  • The average pension benefit of the earliest and last leavers decrease as a result of introducing the implicit tax

  • The general trend is a strong increase of the market withdrawals at age 60 in scenario 2 at the expense of other ages between 61 and 64 years old

  • The rise in inequality among pensioners during the first two decades is less pronounced and inequality in generally lower when the implicit tax is introduced.

  • The impact of introducing the implicit tax on poverty risks is remarkably limited.


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