Reasons for Using a Hypothetical Simulation Model

As briefly discussed in Section 4.2.1, the hypothetical simulation model is used to examine and explore individuals’ outcome based on different characteristics, representing people with specific characteristics in the real world. The purpose of designing a model in this research is

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to study the accumulated entitlements across different life courses among women in Malaysia. Taking into account the research questions stated earlier in the thesis, the reason for using a hypothetical simulation model approach is explained later in this section.

In Malaysia, the first and second Malaysian Family Life Surveys (MFLS-1 and MFLS-2) were designed and administered in Peninsular Malaysia in 1976-1977(MFLS-1) and 1988-1989 (MFLS-2), respectively. The purpose of the surveys was to study household behaviour in diverse settings during a period of rapid demographic and socioeconomic change. These longitudinal surveys investigated household members’ employment, fertility, mortality, education, and income distribution details over the period of two years. Information on the income distribution pattern of households classified according to various socio-economic characteristics has also been collected in a Household Income/Basic Amenities Survey (conducted twice in 5 years) and Household Expenditure Survey, (conducted once in 10 years), respectively to measure the economic well-being of the population in Malaysia. Other surveys conducted in Malaysia include the Education and Social Characteristics of the Population (carried out once in 10 years) and the Labour Force Survey Report (carried out monthly) that collected information on the structure and distribution of the labour force, employment status, educational attainment and marital status, and this information has been compiled and published. However, not all of the information needed for the design of the simulation model proposed for use in this research has been published and is accessible to the public. Since the information is not available for complete life histories for each cohort member, I was unable to develop a dynamic microsimulation model.

An (2004) conducted a study on the impact of recent pension reform in South Korea and faced a similar lack of data. As an alternative to a dynamic microsimulation model, An

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(2004) used a hypothetical simulation model to analyse pension outputs at retirement. Other scholars have also adopted and used a hypothetical simulation model to simulate and project the retirement income or pension prospectively (Evans and Falkingham, 1997; Rake et al., 1999; Davies et al., 2000).

Evans and Falkingham (1997) used a hypothetical simulation model named PHYLIS (Pensions and Hypothetical Lifetime Income Simulation) to examine the consistency of the pension outcome for six different countries, i.e. the United Kingdom, Italy, Sweden, Poland, Chile and Australia. The results of the simulation for countries with a Pay as You Go plan (or Defined Contribution Pension Plan) with a non existing fully funded system (the United Kingdom and Poland) indicated that replacement rate levels were highest among low-paid workers (part-time and with child-care gaps) compared to individuals with no breaks during employment. Rake et al. (1999) used an updated version of the PHYLIS model to explore low-income individuals’ and their partners’ pension outcomes by changing certain assumptions in the model. This is similar to the simulation method used in this research, since in the second stage, the simulation model was developed by considering flexible assumptions in the parameters.

Rake et al. (2000) indicated that a hypothetical simulation model allows a simulation to be carried out in more detail and able to explore wholly on the impact of the policy towards individual outcomes. This is supported by the Pensions and Hypothetical Lifetime Income Simulation Model (PHYLIS) which was developed to compare the national pension system treatment for six different countries and each system’s ability to reduce inequality between men and women, prevent poverty, and redistribute income more fairly between high and low earners.

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There are obvious limitations in using a hypothetical simulation model as the results and findings derived from such a model do not represent the exact pension outcomes. Rather, they illustrate the possible outcomes that may result from Malaysia’s current pension schemes for hypothetical individuals with similar characteristics. In other words, the result from the simulation model will show the level of an individual’s retirement savings and monthly retirement income they might expect to have based on different characteristics, such as different education levels, different employment history, and different retirement account activities (contribution rates and pre-retirement withdrawals). An (2004) also pointed out that it is not possible to generalise from the results, since they are highly sensitive to the choice of hypothetical cases.

Davies et al. (2000) used a hypothetical simulation model to examine on women’s lifetime incomes in Britain and the consequences of different life-courses, such as divorce, motherhood, and employment interruptions, on their pensions. A hypothetical individual’s life course in the simulation will usually have different characteristics, for example, labour force participation, earnings, marital status and educational attainment. One could analyse each individual’s lifetime history or make changes for future projections. Taking a life-course approach, one could analyse each individual’s projections over their entire lifetime including all areas of life, for example family life (Erhel, 2007). However, by having to analyse the effects of the characteristics such as part-time employment and having children, it is impossible to get exact duplicate life histories (Evans and Falkingham, 1997). Although the outputs from this type of simulation only produce pension outcome representative of an individual with similar characteristics to those of the hypothetical individual, they nevertheless provide important information for policy makers and can assist in improving the pension system of the country.

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Due to a lack of longitudinal data, this research used a hypothetical simulation model to predict and examine the effectiveness of Malaysia’s pension system and to explore the outcomes for different individuals at retirement. Such model was valued as most suitable for analytical purposes as I was interested in individual pension outcomes according to educational attainment, career employment history, different retirement age, different pre-withdrawal activities and different contribution amounts made throughout each individual’s employment years. Using a hypothetical simulation model enabled a more sophisticated analysis of hypothetical individual life histories; that is an investigation of the impacts of different types of employment histories on retirement income, an examination of the impacts of factors such as retirement age, contribution rates and pre-retirement withdrawals on estimated retirement income, and exploration of the effectiveness of giving pension credit contributions to women with disruptions in their employment years. Employing a hypothetical simulation model allowed me to analyse the pension outcomes for various individual life histories under different scenarios. Also, importantly, a hypothetical simulation model did not require a complete set of data, unlike static and dynamic simulation models.