The Pension Fund Crisis Was Forgotten

The Pension Fund Crisis Was Forgotten

The pension fund crisis was forgotten. According to Iran Gate, to understand the significance of the pension fund crisis, it suffices to know that over 68% of Iran’s population is covered by 18 pension funds. In other words, if this crisis reaches uncontrollable stages, it could act as a ticking time bomb within Iranian society, destroying everything in its path.

About a month ago, controversial remarks by one of the Ministry of Welfare’s managers about selling the Kish and Qeshm islands to resolve the pension fund crisis sparked reactions from many Iranians. However, a look at the headlines of the country’s media shows that this crisis has been forgotten, and the dismissal of Sajjad Padam was a temporary end to this case. But what is the real root of this crisis, and why is the government unable to solve the problem?

4 Main Roots of the Crisis

Economists and experts believe that the pension fund crisis in Iran has four main causes, which are examined in this report. These four factors include the imbalance of funds due to government interference with their resources, the government’s failure to fulfill its commitments to the funds, flaws in the country’s retirement laws, and structural issues within the pension funds.

A. Government’s Hand in the Seniors’ Pockets

The biggest and most important factor in the emergence of this crisis relates to the government’s encroachment on pension funds’ resources. This practice, which started during Mahmoud Ahmadinejad’s ninth administration, has continued to this day and has peaked under Raisi’s administration. As has been stated repeatedly, governments, particularly during oil sanctions, have faced severe budget deficits.

Therefore, addressing the budget deficit has been the main concern of the government within the structure of the Islamic Republic. However, Mahmoud Ahmadinejad devised a new method to cover the budget deficit, which was dipping into the pockets of retirees who had worked hard for years and hoped to have a small stream of income in their old age. In fact, after dissolving the Planning and Budget Organization, Ahmadinejad paved the way for encroachment on various resources, including national and military pension funds.

While prior to this action, pension funds in Iran, unlike most other parts of the world, were in relatively good condition. This is why experts refer to the mid-2000s as a turning point in the formation of the super-crisis of bankrupt pension funds. There are no exact statistics on the extent of the ninth and tenth administrations’ encroachment on the mentioned resources, but some reports suggest that over 70% of the liquidity in these funds was withdrawn by the executive branch to cover the budget deficit.

B. The Government Owes the Retirees

The government’s debt to pension funds has today become a natural and common occurrence. However, part of this debt pertains to commitments that governments were supposed to fulfill towards the funds but have not done so for various reasons. It is estimated that the value of the government’s commitments to the national pension fund is equivalent to 220% of the country’s gross domestic product.

This staggering figure signifies the complete bankruptcy of these funds and has turned the government into an unending source of debt production. Meanwhile, the assets of these funds amount to only 36% of the total gross domestic product. This approximately 200% gap shows that the situation of pension funds, of which the national pension fund is just one example, has reached the explosive point of the mentioned super-crisis. This approximately 200% deficit has caused these funds, despite being creditors of the government, to always need to receive assistance from the public budget.

C. From Excessive Hiring to Mandated Investments

Another factor contributing to this super-crisis is incorrect and misguided budget policy-making. Moreover, the way these funds are managed and the ongoing corruption have made the case of the funds heavier than ever. For instance, in terms of hiring employees in these 18 funds, there are very concerning and astonishing statistics.

Every group that has come to power with changes in government has brought new teams into the structure of the 18 pension funds in a sweeping manner. Unfortunately, over 90% of these cases have been employed officially. Meanwhile, these funds are facing an overstaffing of more than 65%, and the administration of Ebrahim Raisi has unprecedentedly exacerbated this figure.

On the other hand, governments have indirectly encroached on the resources of these funds. For example, according to the budget law, these funds are required to invest in various projects, but this investment has always been mandatory, and the funds have been forced to accept the projects favored by the government and parliament for investment.

In other words, the funds are obligated to make compulsory investments in projects that often do not even have the value to continue activities on a past scale. Therefore, it is said that the assets of these funds have about 200% less value compared to the unfulfilled commitments of the governments.

D. Structural Issues of the Funds and Demographic Changes

Another major factor in the creation and intensification of the pension fund super-crisis is the very low support ratio. In other words, the number of employees contributing to the fund is very low compared to the number of pensioners or retirees receiving benefits from the fund. Simply put, the inflow to the funds, due to demographic changes and flaws in the national retirement law, is significantly less than the outflow of liquidity from the funds.

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

This factor also causes everything that enters the fund’s treasury to be spent on fulfilling commitments to members. However, on the other hand, governments have mandatory expectations, and at times, like during Raisi’s administration, the fund’s resources are attacked by the government to cover the budget deficit.

This situation, considering that the workforce born in the 1980s will reach retirement age in the next 15 years, could bring this super-crisis to its final explosion point. Because at that time, the current disastrous ratio of 1 to 1 will turn into 1 to 15 or even 1 to 2, meaning that for every contributing member and active workforce, in the best scenario, we will have 15 retirees and pensioners, which signifies a complete catastrophe.