Research and analysis

Analysis of pension reform scenarios in a rational world: An application of the NIBAX behavioural micro-simulation model (WP117)

Research to expand the Department's evidence base on behavioural change in response to changes in pension policy.

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Analysis of pension reform scenarios in a rational world: An application of the NIBAX behavioural micro-simulation model WP117)

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Working Paper No. 117

This working paper outlines findings from modelling to estimate the behavioural impact of:

  • raising the State Pension age (SPA) from 65 to 68
  • a flat-rated State Second Pension scenario compared to the earnings related system as it stood in 2011/12
  • a single-tier scenario (similar to that set out in the Green Paper consultation document, A State Pension for the 21st Century) compared to a flat-rated scenario.

The objective of the research was to expand the Department’s evidence base on behavioural change in response to changes in pension policy.

This analysis used the NIBAX (National Institute’s Benefit and Tax) micro-simulation model, developed by NIESR (National Institute for Economic and Social Research) to assess changes in individual saving and labour supply in response to raising the State Pension age, a flat-rated State Second Pension scenario and of a scenario based on the single tier. The model assumes individuals behave rationally with perfect information which provides a framework to assess behavioural change and does not model transition between one system and another, instead comparing one long-term policy with another.

Assumptions for the single-tier scenario were based on the policy proposal set out in the Green Paper consultation document, A State Pension for the 21st Century, which can be found at: www.gov.uk/government/uploads/system/uploads/attachment_data/file/184899/state-pension-21st-century.pdf.pdf . Since this, the Department has refined the proposed policy, as set out in the White Paper, The single-tier pension: a simple foundation for saving, which can be found at: www.gov.uk/government/uploads/system/uploads/attachment_data/file/181229/single-tier-pension.pdf . Policy developments include increasing the number of qualifying years from 30 to 35, which, based on this modelling may mean that households work and save for a little longer on average than this report suggests.