Integrating “Residual Net Income” for Individuals Aged 60+ into the PASSAGES Microsimulation Model

PASSAGES is an open-source dynamic microsimulation model aimed at supporting policy analysis and research related to the Canadian retirement income system at the individual and family levels. The model simulates demographic processes, labour market histories, pension entitlements, and public pension income. The publicly available version includes a synthetic starting database, the model, and documentation. This paper describes the methodology of the newly added “Residual Net Income” module in PASSAGES for individuals aged 60 and over. In the Canadian tax context, net income represents total income reported on the tax return after allowable deductions, such as registered pension contributions, union dues, and other tax-deductible expenses. The concept of net income is used to calculate the Old Age Security (OAS) recovery tax and the income-tested reduction of the Guaranteed Income Supplement (GIS). PASSAGES already models certain income sources which are included in net income such as employment earnings, self-employment income, Canada and Quebec Pension Plan (CPP/QPP) benefits, and OAS. A residual net income concept was created where these known income sources were subtracted from net income. For the elderly, the income sources included in residual net income primarily comprise pension income from private sources and investment income.

Modelling residual net income presents several challenges, notably the large proportion of individuals with zero residual net income and the presence of sharp, non-linear transitions in many individuals’ residual income across deciles over time. While a majority of individuals remain within their income decile or move by only one decile annually, the model captures the non-linear transitions observed in the tax data. We employ a novel approach to embed these longitudinal dynamics into forward-looking simulations. Using linked tax and census data, we estimate a two-step model combining logistic and quantile regressions to initialize residual net income in 2016. Longitudinal dynamics are simulated using multinomial logit and quantile regression models, with validation based on observed decile transitions and age-specific distributions. Incorporating residual net income enables PASSAGES to compute total family income and supports analyses of income-tested retirement benefits and family-level outcomes.