Simulating Social Security Flow of Funds Based on an Overlapping Generation Model

Abstract

This paper models the assets and liabilities of the Social Security Fund in Iran. The fund's financial position in practice is influenced by the population dynamics between two generations of employed and retired people, focusing on four important characteristics: the premium rate and pension benefits of the working and retired generation, the two-generation employed and retired population pyramid, the employment generation period and the retirement period. In this study, an overlapping generation model is designed to show the dependence of the stability of the fund on the generational population and the transitions between generations taking into account such characteristics. The simulation results show that although the ratio of assets to liabilities can be potentially high, the gap between assets and liabilities of the fund is so high that any of the proposed policies alone cannot close the gap and ensure its stability. Therefore, policy implication s to stabilize the fund's assets and liabilities can be proposed in two scenarios. The similarity of both scenarios is that the government first pays its share of the insurance and secondly increases the premium rate to 10%, with the retirement pension being reduced by 50% in the first scenario and 10% in the second scenario. The results of the analysis show that the improvement of the fund stabilization is mainly dependent on the decrease in retirement pension, which can be stabilized in a certain time horizon.

Keywords

• overlapping generation model
• social security
• premium rrate