from Mazzaferro and Morciano (2008) CAPP_DYN: A Dynamic Microsimulation Model for the Italian Social Security System

CAPP_DYN comes up within a research project carried out by the CAPP (Centro di Analisi delle Politiche Pubbliche) under the auspices of the Italian Department of Employment and Social Policies with the aim of assessing the distributional effects of social security reforms adopted in the previous decade (Ministero del Lavoro e delle Politiche Sociali, 2005). Afterwards, the model has been improved and further developed (Mazzaferro and Morciano, 2005; Morciano, 2007; Ministero della Solidarietà Sociale, 2008).

It allows the simulation of the socio-demographic and economic evolution of a representative sample of the Italian population for the period 2005-2050. The base year population (2005) is derived by the 2002 wave of the Bank of Italy’s Survey of Households Income and Wealth (SHIW). The sample is reweighted in order to align socio-demographic distributions with the Italian population. The dynamic aging of micro-characteristics is probabilistic, in particular it is carried out

by means of finite and discrete markovian processes. Some behavioural functions have been introduced, the main being the one governing the retirement choice. Once the population structure has been defined and labour incomes have been generated the model simulates the main social security benefits, with a high level of institutional detail and according to the pension scheme provision being in force. Then the model can estimate the distributional effects of important social security components as well as the impact of its reforms, allowing the implementation of both cross-sectional (at different point of time) and inter-temporal life cycle (on individuals living in different periods) analyses. Recently a module that estimates the number of disabled has been embedded in the model allowing the projection, over the whole period, of the number of not self-sufficient individuals and the related long term care expenditure.

CAPP_DYN is linked, through an alignment process, to the official demographic forecasts provided by ISTAT and is calibrated in order to follow the GDP and wage growth consistent with the evolution of the number of employed individuals. CAPP_DYN shares, with other MSM models, advantages and drawbacks of this technique. In particular it allows a detailed redistributive analysis of the social security system, which can be carried out both in a cross sectional and in an intertemporal perspective. On the other hand, being based on a population derived from a survey, great attention must be paid to the initial selection to the sample representativeness and the difficulty to extract the effects of unobservables from data. Moreover it is important to remember that CAPP_DYN does not simulate the supply side of the economy. Therefore alignment is a tricky aspect that must always be considered with attention in order to guarantee consistency with external demographic as well as economic forecasts.