The forgotten crisis of pension funds

The forgotten crisis of pension funds

According to Iran Gate, the importance of the pension fund crisis is often overlooked. It is worth noting that more than 68% of Iran’s population is covered by 18 pension funds. In other words, if this crisis escalates to an uncontrollable level, it can act as a time bomb within Iranian society and destroy everything.

About a month ago, the controversial statements of a Ministry of Welfare official regarding the sale of Kish and Qeshm islands to solve the pension fund crisis sparked a strong reaction from many Iranians. However, a look at the headlines of the country’s media shows that this crisis has been forgotten and Sajjad Paddam’s dismissal was just a temporary end to this case. But what is the root cause of this crisis and why is the government unable to solve the problem?

4 main roots of the crisis

According to economists and experts, the pension fund crisis in Iran has four main factors, each of which is examined in this report. These four factors include mismanagement of funds due to government interference, non-implementation of government commitments to the funds, flaws in pension laws, and structural issues with the pension funds.

The government’s hands in the pockets of the elderly

The main and most important factor in the emergence and escalation of this crisis is the government’s reach for pension funds. This practice, which started during the ninth government of Mahmoud Ahmadinejad and has continued to this day, has reached its peak in the current administration. As has been repeatedly mentioned, governments, especially during times of oil sanctions, have faced significant budget deficits.

Therefore, compensating for budget deficits has been the main concern of the government in the structure of the Islamic Republic’s governance. However, Mahmoud Ahmadinejad came up with a new method to cover the budget deficit, which involved taking from the pockets of retirees who had worked hard for years and hoped to have a small income in their old age. In fact, after the dissolution of the Planning and Budget Organization, Ahmadinejad paved the way for seizing various resources, including national and military pension funds.

While pension funds in Iran used to be in a relatively good and favorable condition compared to most other countries, experts refer to the mid-1980s as a turning point in the formation of the pension funds crisis. Accurate statistics on the extent of the government’s contribution to the ninth and tenth funds are not available, but some accounts indicate that more than 70% of the cash reserves in these funds were withdrawn by the executive branch to compensate for budget deficits.

The government owes money to pensioners.

The government’s debt to pension funds has become a natural and common occurrence. However, part of this debt is related to commitments that governments were supposed to fulfill towards the funds but for various reasons, these actions were not taken. It is estimated that the government’s obligations to the national pension fund are equivalent to 220% of the country’s gross domestic product.

Every group that has come to power with changes in governments has brought in new teams into the structure of the 18 retirement funds like a bus. Unfortunately, over 90% of these cases have been officially employed, even though these funds are facing a surplus workforce of over 65%. The Ibrahim Raisi government has intensified this figure unprecedentedly.

On the other hand, governments have indirectly reached into the resources of these funds. For example, according to the budget law, these funds are obligated to invest in various projects. However, these investments have always been done as obligations, and the funds have been forced to accept the desired cases by the government and the parliament for investment.

In other words, the funds are obliged to make mandatory investments in projects that mostly do not even have the value of continuing activities on the past scale. That is why it is said that the assets of these funds have about 200% less value compared to the obligations that governments have not fulfilled.

The structural flaws of the funds and demographic changes

One of the most important factors in the creation and exacerbation of the pre-crisis pension funds is the very low support ratio. In simpler terms, the number of active contributors to the fund compared to the number of pensioners or retirees is very low. In other words, the inflow of funds is significantly less than the outflow of cash from the funds due to demographic changes and flaws in the country’s pension laws.

Currently, this ratio is almost 1 to 1, meaning the inflow and outflow of the fund are equal. However, in developed countries and successful examples of pension funds, this ratio is 3 to 1 or even 6 to 1, meaning the number of contributors is six times higher than the number of pensioners and retirees in these funds.

This factor also results in all the funds entering the treasury being spent on fulfilling obligations to members. However, governments have certain expectations and at times, such as during the term of a major government, the funds’ resources are attacked by the government to compensate for budget deficits.

Considering that the baby boomer generation, born in the 1960s, will reach retirement age in the next 15 years, this event could lead to a final explosion point. In that period, the current ratio of 1 to 1, which is already disastrous, could turn into 1 to 15 or even 1 to 2. This means that for every active worker, we will have 15 retirees receiving pensions under the best conditions, which signifies a full-blown disaster.