Features

Looming Disaster for Pension Funds in Iran?

January 9, 2018
Ali Sodaei, BBC Persian
8 min read
Retired steelworkers say that 30 years of paying for retirement insurance has been wasted (Photograph: Tasnim News Agency)
Retired steelworkers say that 30 years of paying for retirement insurance has been wasted (Photograph: Tasnim News Agency)
In recent years the retires have repeatedly protested against their situation (Image: Iranian Labor News Agency)
In recent years the retires have repeatedly protested against their situation (Image: Iranian Labor News Agency)
Looming Disaster for Pension Funds in Iran?
Protest rally by retired steelworkers in Isfahan
Protest rally by retired steelworkers in Isfahan

This is the second of two articles about Iran’s economy produced by BBC Persian. It was originally published in Persian on December 23, about five days before the recent protests. 

Read the first part in the series: Iranians Are 15% Poorer than a Decade Ago

 

On December 18, in Isfahan, known as one of the most important bases for the Islamic Republic, protesters chanted: “A revolution we made. What a mistake we made.”

The repentant revolutionaries were retired steelworkers from Mobarakeh Steel and Isfahan Steel companies. They say that they have not received their pensions for the last two months. Some even say that that part of what they are owed has not been paid for almost five years.

In recent years, retired steelworkers have staged regular protests and have even protested outside the presidential office and the parliament building.

But retirees and pensioners have complained about other funds too, not only the Steelworkers Retirement Fund. Other funds face similar problems and changes in the Iranian job market, combined with chronic economic recession, have pushed many of these individuals to the edge of the precipice.

Each employee or worker and/or his employer regularly contribute to the retirement fund through the  payment of insurance premiums. In some cases the government also pays part of the retirement insurance or provides tax incentives for them. Accumulation of these contributions enables retirement funds to make investments. The proceeds from these investments and from current job-holders making payments for retirement insurance is used to pay the retirees.

As a result, if profits from investments or retirement insurance premiums fall below a certain level, the fund encounters problems in paying retirees. This is what Iran’s retirement funds are facing.

Investing in Companies that Lose Money

The situation is so unsettling that President Rouhani has conceded that “none of the funds are able to live up to their commitments.” And, according to Parliament Speaker Ali Larijani, “Unfortunately the funds have many problems and the Social Security Organization is, perhaps, in the best shape.”

But even the fund that Larijani describes as being the healthiest is not doing so well. Parliament’s Research Center has warned that it also faces a potential crisis that “can lead to widespread economic and social unrest across the country.”

In general, Iranian retirement funds face two problems. The amount of pension that these funds need to pay out has increased, but the retirement insurance contributions have not gone up at the same rate, and in certain cases, they have even fallen. The other problem is that the expected income from their investments has not been realized.

For instance, 55 percent of the Iranian Tobacco Company belongs to Steelworkers Retirement Fund but, according to various officials, the company is losing money and not making any profits for the fund. The government contributes shares to the fund in lieu of what it actually owes it, and directors of the fund say this is not the only situation like this: The government is contributing to other money-losing companies too. 

And yet another problem is that, starting more than 10 years ago, the Social Security Organization insures all of the steel industry’s new employees. As a result, the amount of insurance money that the fund receives has gone down.

Consequently, there is an imbalance between the obligations of the fund towards the retirees and the resources at its disposal for meeting these obligations. In certain cases, as with the steelworkers fund, the government has been forced to earmark part of its budget to pay the pensions. In other words, the pensions are paid from the general budget and not from the income of the funds, which were supposed to be used for paying pensions.

The Big Gap Between Obligations and Resources

In addition to the problems at the Steelworkers Retirement Fund, the Social Security Organization and the National Retirement Fund, the biggest two funds in the country, are also facing increasing difficulties paying retirees.

Statistics from the Social Security Organization show that the deficit in its income-outlay equation has increased from five percent in the Iranian calendar year 1384 (which started in March 21, 2005) to about 15 percent in recent years.

 

The situation at the National Retirement Fund is even worse. In the calendar year 1382 (beginning March 21, 2003) this fund was able to pay 78 percent of the pensions from retirement insurance contributions that it received, but this ratio has fallen sharply, and in 1395 (started March 20, 2016) these contributions accounted for only 26 percent of the pensions that it had to pay.

Another problem that retirement funds face is the drop in the “support ratio,” meaning the ratio of the insured to pensioners. According to Parliament’s Research Center, the Social Security Organization’s support ratio has fallen so low that it cannot pay all pensions just by using existing cash resources.

The “support ratio” has fallen over the last eight years because the growth in the number of pensioners has outpaced the growth rate of the insured. Since the calendar year 1388 (which started March 21, 2009), the average growth rate of the pensioners for the organization has been 8.22 percent, whereas the retirement insurance payments have increased at a rate of only 5.06 percent.

Again, the National Retirement Fund is in an even worse situation. The number of the retirees for this fund has increased constantly while the number of job-holders who pay for retirement insurance has fallen.

 

Recession, Unemployment and Bad Investments

But why have retirement funds ended up here? Why do payments go out to more and more pensioners while insurance contributions and profits from their investments are unable to pay for it?

One reason is the recession that has dominated the Iranian economy in recent years. In five of the last 12 years, the rate of growth in gross national product (GNP) has been negative or close to zero. And when there is a recession, retirement funds do not make enough money from their investments to pay pensions. In the last three decades the average net rate of return for the Social Security Investment Company, a subsidiary of the Social Security Organization, has sat at just 0.3 percent. In other words, the organization does not profit in any meaningful way from its investments.

Some experts point to structural errors in the way the funds manage investments, and say that these errors, combined with the recession, are responsible for the  low returns.

But the effects of recession go further than retirement funds conducting damaging investments. One effect is that the employers are less able to pay the retirement premiums for their workforce. What is more, thousands of companies have gone out of business throughout these years and, therefore, these businesses do not pay insurance premiums for their workers.

An economic recession either pushes up the rate of unemployment or brings down the growth in employment. In recent years the rate of unemployment in Iran has climbed to over 12 percent while the rate of economic participation has declined, meaning that the ratio of those who have lost hope of finding jobs has increased. Less than four out of 10 Iranians are now looking for jobs.

As a result, the ratio of the employed compared to the total population has declined, and it is the job-holders whose insurance premiums provide the retirement funds with an important source for paying their current expenses.

What adds to the problem is the increase in recent decades in temporary and unofficial work contracts or no-contract jobs that do not fall under labor laws. Temporary workers constantly complain that their employers do not pay their insurance premiums and, of course, no payment is made for the insurance of no-contract workers unless they buy insurance as individuals and pay for themselves.

Besides the factors mentioned above, changes in life expectancy has also contributed to the rise in the pensions that the funds must pay. In the last quarter of a century, life expectancy in Iran has increased remarkably by almost 10 years — from 67 to 76.

On the other hand, the average age of retirement in Iran has only not increased but has fallen by almost one year to around 51. This means that, on average, retirement funds must pay 10 years more for each single retiree. And, in addition to paying more for each retiree, the number of retirees has also increased.

And, if that is not bad enough, the gradual “graying” of the Iranian population over the next two decades — when the “baby boom” generation of the 1980s reaches retirement age — could turn into an even bigger threat.

The Iranian government might be able to prop up the retirement funds for the next few years by injecting them with money and pay the pensions from its general budget, but this goes against the very existential philosophy of retirement funds.

The crisis could be delayed, but without solving the structural problems of unemployment and recession in Iran and without establishing a lasting balance between income and expense, retirement funds resemble time bombs set to go off — perhaps not today or tomorrow, but a few years from now.

If such a disaster happens, its reach will go far beyond delays in the payment of pensions to a few thousand retirees.

 

Read part two in the series:  Iranians Are 15% Poorer than a Decade  Ago

comments

Features

Iranians Are 15% Poorer than a Decade Ago

January 9, 2018
BBC Persian
3 min read
Iranians Are 15% Poorer than a Decade Ago