A Close Look at Iran’s Looming Pension Fund Crisis
The possibility of pension fund bankruptcy looms large in Iran, portending a major and unprecedented threat to Iran’s economy and society.
An Iranian government official recently elaborated on the severity of the pension funds crisis. He compared it to the Greek economic crisis of the past decade, which led the Greek government to sell off hundreds of islands to private bidders. These remarks generated heated public reactions.
The Greek government’s situation and approach to its economic crisis is not comparable to Iran’s. However, official data from the Islamic republic indicate the pension funds crisis in Iran is especially severe, and its potential social and economic fallout is extensive.
According to official statistics, over 25 million retirees and pensioners are covered by pension funds. Assuming that the income of each pensioner directly affects the livelihood of one and a half individuals, this crisis could impact the lives of approximately 30 million Iranians. In the near future, with the proportion of the elderly population rising, it could directly affect around 50 million individuals.
Out of 17 existing funds, several large funds, including the National Pension Fund and the Armed Forces Social Security Organization, are undoubtedly bankrupt. One very large fund, namely the Social Security Organization, is on the verge of bankruptcy.
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The above chart represents the support ratio for two major funds. These two funds collectively cover over 21 million pensioners, which is equivalent to 84% of the total retired population.
The support ratio represents the ratio of the income to the payouts of the funds. It is equal to the ratio of the number of insured individuals to the number of pensioners. The minimum support ratio for an insurance organization to avoid bankruptcy is 3.
It seems that the most important factor in reducing the support ratio of the fund is the increase in the aging population and early retirement. The two graphs below illustrate the changes in the average retirement age and the life expectancy index over the past 70 years.
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However, alongside this increase in the inclination towards early retirement, it has also led to further fragility in the state of the funds. According to available data in the research report of the Parliamentary Research Center, the ratio of early retirement in the Social Security Organization has increased from approximately 14% to over 50% over a decade. It appears that the exacerbation of the economic crisis and a significant decrease in wages in Iran are influential factors in the increased inclination towards early retirement.
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The accumulation of unaddressed issues including inefficiency, corruption, mismanagement of investment funds, and inability to effectively utilize existing assets are among the causes of the pension fund crisis.
As an example, the Social Security Organization’s investment strategy, which is centralized in the "SHASTA" portfolio, has only provided 2 to 8 percent of the needed resources in the past five years.
This ratio in the Pension Fund Investment Company and its holdings accounts for 8 to 14 percent of the required resources for this organization. This is while 60 to 70 percent of the resources of this organization are provided by government subsidies.
The National Pension Fund is not the only fund that receives subsidies. The Social Security Organization for the Armed Forces, the Broadcasting Pension Fund, and several other funds also receive government aid.
The figures of the annual budget over the past 10 years indicate that the share of pension funds from the general budget has increased from approximately 12% in 1393 (2014) to over 15% currently.
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Fifteen percent is a significant and concerning figure. It is equal to 80% of the total salaries and wages of government employees. It is 20% of the total expenditures of healthcare institutions such as the Ministry of Health, hospitals, medical universities, and related institutions. It also is equal to 1.25 times the total education budget, including the budgets of the Ministry of Education, universities, all research centers, and the Ministry of Science.
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The National Pension Fund, Armed Forces, Steel Pension Fund, and the Ministry of Intelligence Pension Fund, as well as other organizations receive government subsidies. The great concern is that in the not-too-distant future, the Social Security Organization, which alone covers approximately 75% of retirees, will further burden the national budget.
The purpose of establishing self-sustaining funds is to relieve the burden of paying salaries to individuals after the end of their active economic period. Pension funds are primarily intended to be managed in this way. However, when the cost of pensions is imposed on the general budget, it must be recouped through reducing the budgets of other organizations, such as healthcare and education institutions, alongside active employees' salaries. Otherwise, it will result in budget deficits and accumulated government debts, leading to further inflation.
