Improving Information for Social Policy Decisions -- The Uses of Microsimulation Modeling: Volume II, Technical Papers (1991)
Chapter: Retirement in DYNASIM2
with the wage equation. The error structure of the wage equation is conceptually identical to that of the labor force participation equation, with a serially correlated transitory component and an individual-specific fixed component. In addition, the error term of the wage equation includes a transitory component that is shared with the hours equation. This term has no economic interpretation but is included in order to generate the observed negative correlation between wage rates and hours in a cross section. The term cancels out so that it leads to variation both in wage rates and in hours, but does not lead to variation in earnings.
Retirement in DYNASIM2
The Jobs and Benefits History submodel of DYNASIM2 determines when the individual retires and the amount of retirement income available from each source. As in the Family and Earnings History submodel, the Jobs and Benefits History submodel takes an individual and cycles through five routines for a single year, then goes to the next year and processes the five routines again. When it reaches the individual’s final year, it goes on to the next individual. The five routines include retirement, jobs, social security benefits, employer pension benefits, and individual retirement accounts (IRAs).
The retirement module may be run as part of DYNASIM2 at the user’s option. If it is run, the module’s choice of retirement age for the individual overrides whatever pattern of labor force participation may have been modeled earlier in the labor force section of the Family and Earnings History submodel. The retirement module determines whether the individual retires at a given age based on eligibility for pensions and social security at that age and on the difference between the discounted stream of pension and social security benefits available if the individual retires this year relative to next year.3 The retirement module is run only on individuals age 58 and over.
The retirement simulation is based on a two-equation behavioral model. In the first equation, the module simulates whether the worker leaves the current job based on age, disability, current earnings, eligibility for pension or social security, and the change in social security and pension wealth if retirement is delayed by 1 year. If the worker does leave the current job, the module then simulates whether that worker accepts a new job, on the basis of a similar set of variables. If the worker accepts a new job, the jobs module simulates job and pension characteristics (described below). If the worker does not take a new job, he or she is out of the labor force for this year and all subsequent years of the simulation.
