Parametric Reform of Iranian Pension System with Imperfect Labor Market: Utilizing Replacement Rate Reduction and OLG Model Approach

Abstract

Macroeconomic fluctuations and demographic changes have led to problems in Iranian retirement funds and lack of sustainability in their resources and expenditures. Because of ageing population and the effect of inflation on depreciation of pension funds’ reserves, it is imperative to carry out parametric reforms such as a reduction in the replacement rate. The purpose of this study is to examine the effects of reducing replacement rate on macroeconomic variables. The model used in this research is based on overlapping generations general equilibrium approach with an emphasis on imperfect labor market. Our findings show that ageing population leads to a reduction in interest rate (%4), a shortage of young workers and a rise in wages (%20) in labor market. In Addition, ageing of population will increase the cost of the pension system (%7). A parametric reform of reducing replacement rate (0.2) leads to reduction of pension system costs (%2). It also leads to a reduction in interest rates (%4.8). In long-run, reducing replacement rate leads to increase in capital accumulation and saving.

Keywords

• pension systems
• parametric reforms
• imperfect labor market
• overlapping generations general equilibrium model