Pension System Reform and it's Effects on Income Distribution, Poverty and Capital Accumulation: An Application For Iran

Dashtban Faroji, Majid; Samadi, Saeed; Dallali Isfahani, Rahim; Abdollahe Milani, Mahanosh

Pension System Reform and it's Effects on Income Distribution, Poverty and Capital Accumulation: An Application For Iran

Authors

¹ Ph.D. Student of Economics at Isfahan University

² Assistant Professor of Economics at Isfahan University

³ Associat Professor of Economics at Isfahan University

⁴ Assistant Professor of Economics at Allameh Tabatabai University

Abstract

Lack of data, income or solely precautionary considerations have caused people act
differently in their life cycle rather than what is expected of them. These differences are
mainly related to educational levels, production capacity and their differential pension
conditions. The assumption is that people have planned for their old age through
different forms of savings at earlier stages of life. Since this may not happen, the aim of
social security programs is to solve retirees problem that cannot compensate their income
deficit. This paper analyses and simulates Iran’s Pension System by using an overlapping
generations model. Thus, we study the effects of transition from the Pay-As-You-Go
Pension to the Fully Funded Pension System on capital accumulation, income
distribution and poverty. Simulation results show that in addition to higher levels of
lifetime utility, The Fully Funded Pension System compared to Pay-as-you-go provides a
higher physical capital accumulation for the economy. The transition to Fully Funded
System creates two different and opposite effects on poor people. On one hand, poor
people economic conditions deteriorate and on the other hand, since they receive returns
on their savings, they have an opportunity to be placed in a better situation, because the
Fully Funded System enable them to have an access to financial institutions.

Keywords