• D31;
  • J11;
  • J14
  • forecasting;
  • income distribution;
  • microsimulation;
  • pensions;
  • population aging

This paper analyzes the income distribution of the Dutch elderly using a microsimulation model. Microsimulation models allow for detailed estimates of the income distribution. Our model deviates from traditional models by explicitly considering the persistency and heteroskedasticity of real income shocks. In this way, modeling all underlying processes influencing household income becomes less necessary, which can improve the trade-off between refinement and tractability of microsimulation models. We show the results of three model specifications with different levels of refinement. The results are in line and indicate that between 2008 and 2020, the highest predicted annual growth among the elderly is for median-income households (about 1.2 percent). High-income households have a somewhat lower predicted growth (about 1.0 percent) and low-income households only have a predicted annual growth of 0.5 percent. Inequality therefore seems to increase in the lower part of the distribution, while it will probably decline in the upper part of the distribution.