Microsimulation for Financial Planning and Policy Analysis
In this presentation, Marvin Avery and Richard J. Morrison discuss the importance of incentives, traditional longitudinal dynamic microsimulation modeling, and the challenges faced by traditional models regarding incentives and data limitations. They introduce Ruthen, a microsimulation package specializing in financial strategy consequences, and explore Ruthen-2 and its features for executing financial models. The content provides insights into welfare traps, marriage penalties, labor markets, early retirement, and more in the context of policy analysis.
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Presentation Transcript
Strategy, Meet Policy; Policy, Meet Strategy: Marvin Avery & Richard J. Morrison The Ruthen Team International Microsimulation Association On-line December 1 3, 2021
Presentation Overview Importance of incentives Contributions of traditional longitudinal dynamic microsimulation modeling Ruthen, software for financial planning, and policy analysis Using Ruthen-2 for policy applications Ruthen-3: Extensions and relevance for policy analysis why you d want to use it 2
Incentives: Perverse Results When Programs Don t Play Well Together Welfare traps not worth working Marriage penalties better off not marrying, or even divorcing if married Black and gray labour markets, and crime as a career choice Encouraging early retirement Discouraging saving 3
Traditional Longitudinal Dynamic Microsimulation Many models, many foci, regular feature of conferences since IMA s inception Increasing proficiency in capturing demographics, pensions, tax/transfer systems, wealth, and behavioral effects Address aggregate impacts, adequacy, sustainability Sub-population breakouts, winners/losers analyses, identification of extreme cases 4
Traditional Models Face Challenges Regarding Incentives Data limitations wrt assets, saving & dissaving, and personal preferences Complexity of asset & debt portfolios Voluntary saving and DC pensions Decumulation, and drawdowns during working/accumulation phase End of life expenses, estate disposition 5
Ruthen What It Is Microsimulation package for consequences of financial strategies Purpose-built language for financial planning objects and actions Ruthen program executes models written in the Ruthen language Includes risks, realistic tax/benefits Emphasis on flexible outputs 6
Ruthen-2 How It Works A model describes subject, tax/transfer system, risks, financial instruments, e.g., assets & incomes, and financial strategy Independent execution of model and strategy many times, e.g., a million Flexible accumulators record results Variety of output formats for standard and customized consequences 7
Ruthen-2 Major Features Systems perspective necessary can t get realistic, meaningful results without it Meaningful measures, e.g., transactions, net worth, & consumption Supports paired apples to apples comparisons for twinned units Generalizability through parameterized language objects and functions 8
Ruthen-2 Financial Planning Applications: Accumulation and decumulation strategies Stress tests on planning assumptions End of life costs and after-tax estates Risk-sharing financial instruments, e.g., tontines Changes in standard of living upon survivorship or divorce 9
Ruthen-2 Policy Applications - 1 Ruthen as a complement to, not substitute for, traditional longitudinal dynamic models Individual, and government, internal rates of return on private, voluntary saving Individual, and government, internal rates of return on mandatory public pensions Consumption impacts of early and delayed take-up of public retirement pensions Public pension enhancements 10
Ruthen-2 Policy Applications - 2 Example generation for communications Choosing desirable financial strategies sensitivity to tax/transfer systems Marriage tax capacity to include survivor pensions & impact of tax treatment of capital gains in housing More generally: Identifying unintended side effects of proposed policies 11
Ruthen-3 Extensions for Planning and Policy Allow more people, children, and family units in a model, for easier comparisons Generalize private pensions, and the accumulation of entitlements (DC & DB) Additional data structures for modeling ease, and greater output customization Debug facility breakpoints, inspection Strategy optimization, using genetic algorithms 12
Ignoring Incentives Why, and When It s too complicated, and too expensive, to use the necessary systems perspective. I m only paid to work on my program. When we want the money, we ll take it. We don t have to worry about that. They can t do the calculations. Result: recurring complaints that the public is not using programs and provisions as intended 13
Why Would One Use Ruthen in Policy Development? Build realistic custom longitudinal examples for communications strategies Explore meaningful policy consequences for key or sensitive groups Compare alternative policies, and conduct sensitivity analyses at individual level Identify, and understand, perverse effects and incentives glass box, not black box Identify, & confirm or refute, potential attacks on existing or proposed policies 14
Strategy, Meet Policy; Policy, Meet Strategy Thanks for your attention! A paper is available for this presentation Marvin Avery marvin_avery@yahoo.com Rick Morrison: richard.jay.morrison@gmail.com The Ruthen Team 15
