Interim Report IR-01-026/July Microsimulation Modeling of Population, Economic Growth, and Social Security Systems

Interim Reports on work of the International Institute for Applied Systems Analysis receive only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute, its National Member Organizations, or other organizations supporting the work. Abstract This paper is a first step in trying to develop a modeling and simulation framework that allows to incorporate the strengths of microsimulation in economic growth modeling in the context of demographic change. This is mainly done by restating and programming an existing neoclassical macroeconomic growth model in terms of microsimulation, which allows to explore and demonstrate some of the features microsimulation techniques can possibly "add" to this kind of modeling. The starting point of the analysis is the IIASA "Social Security Forecasting and Simulation Model", developed by the IIASA Social Security Reform (SSR) Project as described in MacKellar et al. (2000). This model was developed to study the influence of pension systems on the economy mainly by investigating long-run capital accumulation and economic growth as functions of the evolving age distribution of the population and the nature of pension schemes. Differently to most economic growth models, the IIASA macro-model explicitly introduces "realistic demography" by disaggregating the household sector (and all model outputs) by age cohorts. This kind of economic modeling is incorporated in a dynamic microsimulation framework by further disaggregation of the cohorts to the individual micro-level. Allowing for heterogeneous individual agents, economic and demographic behavior can be modeled taking into account a wide set of individual and household characteristics. As part of this research a " microSSR " software is developed, both as a tool for the testing of different behavioral theories and as a projection and forecasting tool. iv Acknowledgments