Islamic Economic Solutions for Addressing Pension Fund Imbalance Issues

Introduction & Objectives
Islam views social security as one of the primary responsibilities of society, centered around governance. This concept is emphasized and explicitly stated in Article 29 of the Constitution of the Islamic Republic of Iran. The mechanisms designed to achieve the objectives of the social security system in various societies, including Iran, largely rely on insurance systems, implemented through insurance organizations and pension funds. These funds, by collecting insurance premiums, undertake commitments that require payments to specific individuals at designated times. The efficiency of pension funds hinges on a sustainable balance between their financial resources and expenditures. However, in recent decades, these funds have faced serious financial imbalance challenges.




 
 
 
 
 




To overcome the financial difficulties of pension funds, reforms have been considered in two main forms: parametric and structural. Among the most significant structural reforms is the stratification of social security services across different layers to reduce the financial pressure on the funds. The primary issue lies in determining how to structure this layering system in a way that fundamentally addresses the problems of the social security system, particularly the financial imbalances of pension funds.
This research focuses on the issue of pension fund imbalances in Iran and their causes, including the neglect of social security functions in Islam. It examines a form of layering based on Islamic principles that encompass all social security functions in Islam, thereby preventing their confusion in practice.
 
Method
The latest financial status of pension funds in Iran has been described and analyzed based on the most recent data available from reliable sources, along with an examination of its root causes. To address the financial imbalance of these funds, the solution of layering social security services based on Islamic texts and perspectives, particularly centered on the views of Shaheed Sayyid Muhammad Baqir al−Sadr (ra), has been explored. This is a novel discussion that has received little attention.
The proposed innovation in this research is the stratification of social security services into five layers: preparatory, guarantee, restorative, security (Risk coverage), and supplementary. This approach aims to utilize the full capacity and functions of the Islamic social security system. It is designed to reduce the financial burden on pension funds, decrease their dependency on government budgets, and ensure the welfare of pensioners.
 
Findings
The findings of the research indicate that the most important structural reform within the framework of Islamic economics is the stratification of social security services into five layers: preparatory, guarantee, restorative, security(Risk coverage), and supplementary. This stratification is designed to separate support−based services from insurance−based services within the social security system. Insurance−based services, intended for wealthy and high−income individuals, are financed through Defined Contribution (DC) schemes and investment plans, while support−based services, targeting low−income or income−less individuals, are funded through public, communal, and governmental resources.
With these reforms, the supportive and non−supportive functions of the social security system are practically separated, ensuring that each group of beneficiaries has dedicated administrators and financial resources. Beneficiaries under the supportive function of the social security system are fully provided for in the guarantee and restorative layers, while those under the insurance function are covered in the security and supplementary layers. The preparatory layer focuses on providing welfare infrastructure and opportunities for everyone in society, aiming to reduce the number of those needing support to a minimum over time.
As a result of these reforms, the financial pressure on pension funds is reduced, and gradually, their imbalance is corrected.
 
Discussion & Conclusion
The low support ratio (around 3 on average across funds), high replacement rate (over 80 on average), high expenditure−to−revenue ratio (around 150 on average), and the increasing ratio of liabilities to assets indicate that most pension funds in Iran are either currently experiencing financial imbalance or are at risk of it. This situation points to the funds' inability to meet their obligations and their dependency on the government budget, which threatens the welfare of retirees and the elderly.
Currently, despite the pension funds benefiting from national public budget resources and credits, the level of benefit adequacy provided by these funds is relatively low, posing an additional challenge. In the long−term outlook, estimates suggest that the reserves of these funds will be depleted to zero, and their unfunded liabilities will continuously increase. Consequently, the level of benefits will significantly decline, jeopardizing the welfare of pensioners.
Various demographic, structural, and managerial factors contribute to the current situation, with the most significant being the lack of attention to the different functions of social security and the specific tools and solutions required for each. The conflation of these functions imposes a heavy, often unfunded financial burden on pension funds. The most crucial structural reform needed is the stratification of social security services−a concept that has been increasingly emphasized by countries and international organizations over the past few decades, and various forms of stratification have been implemented.
These stratifications must focus on the three primary functions of social security: the supportive function, the risk coverage function, and the function of ensuring livelihood during retirement. By identifying the appropriate tools and solutions for each function and distinguishing them from one another, each pension fund can concentrate on its primary function without bearing unnecessary financial burdens.
The stratification of social security services in Islam, tailored to the different functions of social security with specific tools and solutions for each, is best organized into five layers: preparatory, guarantee, restorative, security, and supplementary.
The preparatory layer functions as a supportive mechanism for all segments of society, providing opportunities for work, effort, and income generation, aiming to minimize poverty within the community. The guarantee and restorative layers focus on the supportive function of social security, utilizing their dedicated tools and solutions to cover all living needs, risk protection, and retirement provisions for low−income or income−less groups in the lower−middle and lower classes of society.
Meanwhile, the security (Risk coverage) and supplementary layers address the functions of risk coverage and retirement provision for the middle to upper segments of society.
By implementing this stratified approach, the three core functions of social security−each with its dedicated tools, solutions, administrators, and financial resources−are separated, eliminating the existing overlaps in the social security system. As a result, both the government and pension funds will clearly define their respective areas of responsibility, freeing themselves from overlapping roles and financial dependencies on each other. This clarity allows them to fully provide for the groups under their coverage, ensuring that the welfare of no social segment is jeopardized.