Despite the fact that nearly 65% of Iranians are under the coverage of various social insurance schemes, the organizations handling the schemes, in particular pension funds, are in dire straits as the numbers of retirees continue to grow at alarming speed.
While civil servants and the armed forces have their own separate pension systems, the Social Security Organization (SSO), a key social insurer covers wage-earners, salaried workers as well as voluntary coverage for the self-employed. SSO is a nongovernmental organization and it is solely financed by contributions of the insured (7%), employer (20–23%) and government (3%). Membership in the social security system is compulsory for all employees.
However, social insurance schemes, namely the pension systems, have been grappling with serious crises over the past decade that has put the issue in the spotlight on par with the water crisis and the environmental degradation. It is seen as the third most challenging issue now in the country necessitating the government and Parliament to focus on it in the upcoming five-year economic development plan (2016-2021).
Masoud Nili, a senior economic advisor to President Hassan Rouhani addressing the Fifth Annual Conference on Monetary and Fiscal Policies, hosted by Financial Tribune’s sister publication Donya-e-Eqtesad at the Iran Banking Institute in Tehran last week, addressed the issue citing pension funds, like those for government employees and armed forces, as some of the reasons for the surge in government debts that has become a major challenge for the administration.
In sum, “pension funds are now facing major challenges due to an imbalance between income and expenditures,” says an article by social security expert Ali Heydari in the ‘Tejarat-e Farda’ weekly.
A growing challenge for many nations, including Iran, is population ageing. As birth rates drop and life expectancy increases, a larger segment of the population comprises of the elderly. This means fewer workers paying insurance for every retired person claiming pension.
In many countries this also means that the government and public sector pensions could potentially be a drag on their economies unless pension systems are reformed or taxes are increased. Experts have been quoted as saying that one method of reforming the pension system is to increase the retirement age.
The insured-to-pensioner ratio is a major indicator of the viability of any pension fund, and must equal or exceed 5 under ideal circumstances. That is to say, there should be 5 (or more) insured people for every individual collecting pension within a system. A below-three ratio is seen as an existing or impending crisis.
Maintaining Balance
Maintaining a ‘balance between resources and expenditures’, and ‘input and output management’ based on principles of insurance premium calculations are key to financial sustainability of pension funds.
As the nature of insurance funds are intergenerational, which means the current challenges probably stem from polices/decisions made by those in charge years or decades ago, global studies recommend that actuarial research be wisely incorporated in planning pension funds.
While some challenges are in the nature of the business, and just like in any other enterprise, must be mitigated before the decline period. Most challenges are imminent and the direct result of certain decisions, including outsourcing, privatization, downsizing, employing ICT, and changing recruiting methods. Thus, compensation and reconstruction strategies must be devised in a timely manner.
Economic factors such as inflation, unemployment, stagnation, low rate of investment, excessive imports, as well as demographical variables including the aging population, increasing life expectancy, brain drain, insufficient knowledge on the importance and workings of insurance systems and a lack of a long-term outlook are other factors contributing to the emerging crises.
The article suggests applying principles, rules and regulations of insurance premium calculations, introducing incentive mechanisms as well as adjustment mechanisms for people to continue working and paying premium for more years, establishing a social security regulatory authority, and adopting a multi-layer social security system, specializing activities and structures, and smart resource management as some of the practical resolutions to address the issue.
Addressing the 11th meeting of heads of Iran Traffic Police in Tehran on Sunday, Head of the Management and Planning Organization Mohammad Bagher Nobakht Haghighi singled out the looming issue of pension funds among major ones, next to water scarcity and environment, to be addressed in the next FYDP, stressing that “failure to do so will lead us into a deep crisis.”
