Population Ageing and Government Age Pension Outlays: Using Microsimulation Models to Inform Policy Making

Population ageing is expected to present major challenges to the financing and sustainability of welfare state programs in industrialised countries. Policy makers are using dynamic microsimulation models to evaluate and test the longer-term revenue and distributional impacts of possible policy reforms to pension, taxation and other programs. This paper first reviews the dimensions of population ageing in Australia and Japan and then examines dynamic microsimulation models in use internationally. The paper then outlines the Australian ‘three pillar’ system of retirement incomes and describes how NATSEM is developing the Australian Population and Policy Simulation Model (APPSIM), in collaboration with government, to examine the future distributional impact of possible policy changes. While the APPSIM model is still under development, with the first prototype being scheduled for completion at end 2009, this study presents the first illustrative outputs from the APPSIM model of the impact of three possible policy changes – namely, increasing the government age pension age from 65 years to 67 years; increasing the superannuation guarantee rate from 9 to 15 per cent, and increasing the superannuation preservation age from 55 to 60 years.