Why Pension Funds could face Bankruptcy Tsunami

Minister of Cooperatives, Labor and Social Welfare Ali Rabiee has expressed his concerns over the alarming conditions of pension funds. Addressing parliament on June 14, 2016, he said, “The total budget deficit of pension and insurance funds stood at about 360 trillion rials [$11 billion]” through the end of the Iranian calendar year 1394 (ending March 19, 2016).

He added, “Casting a blind eye on fund-holding principles caused the deficit to grow from approximately 42 trillion rials [$1.3 billion] in 2005 to 600 trillion rials in 2013, adding to the government’s debt, and continuing the same trajectory, the deficit is climbing exponentially.”

Meanwhile, the demographic transition Iran is experiencing suggests that the number of people paying social security premiums will gradually decline while those entitled to the benefits of yearslong contributions to the pension system will increase. Indeed, it is estimated that the percentage of over-65-year-olds in Iran will reach 10%, 15% and 25% in 2021, 2036 and 2049, respectively. The disproportion between contributions received and benefits paid by pension funds severely damages their financial capability.

Needless to say, the promised benefits are not in line with retirement rules and contribution rates. As is the case in Iran, basing pension entitlements on the final two years of earnings rather than the average of pay over one’s lifetime appears unfair and might be open to abuse. This has worsened the standard for the replacement ratio, meaning a person’s gross income after retirement divided by his or her gross income before retirement.

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