3 T-DYMM : the Treasury Dynamic Microsimulation Model of the Italian Pension System 1

The long-term development of the social security system is a crucial policy issue in terms of both financial sustainability and adequacy, which constitute a difficult trade-off facing the policy maker. The particular complexity of this issue, also in the light of demographic dynamics and the recent economic crisis, has encouraged the development of dynamic microsimulation models as to analyse the distributive effects of pension reforms in the long run. This study presents T-DYMM, a dynamic microsimulation model developed within a European funded project runned by the Treasury Department of the Italian Ministry of the Economy and Finance in collaboration with the Fondazione G. Brodolini. The distinct character of T-DYMM compared to other models is, above all, its innovative dataset, Ad-SILC, which includes microdata needed to estimate conditional probabilities of transitions across alternative employment states and parameters of wage equations. The estimated coefficient are then used to simulate transition probabilities in T-DYMM and wage dynamics, taking into account fragile careers. A number of simulations are presented on the distributive effects related to the latest legislative changes affecting the Italian pension system. To better exploit adequacy concerns, replacement rates are shown after personal income taxation, long run poverty rates are projected as well as trends of beneficiaries of social assistance allowance and minimum pension supplement as a ratio of total pensioners. JEL Classification: C1, C53, H23, H55, J24, J26.