The Effect of Replacement Rate Changes in Social Security Pension Fund on the Capital Stock, Labor Supply and Saving

As a set of policies and action plans for supporting the poor and aiding the help seekers, social security is a phenomenon especially attributed to the modern industrial age. Therefore, revising and reforming the basic principles of social security is indeed a new phenomenon since many problems in this area have recently surfaced. These problems arise from the imbalance in revenues and costs of social security systems. Nowadays, many European countries are faced with the phenomenon of the aging population as a serious crisis while lacking necessary infrastructure to address such a challenge. Consequently, the problems regarding social security system are becoming even more complicated. This study analyses the effects of replacement rate’s parametric reform on the social security system in Iran by using a six-year-period overlapping generations model. The aim of this research is studying the effects of change in the replacement rate on capital accumulation, savings and labor supply. New findings show that labor supply, individual savings and eventually the level of aggregate capital stock would drastically rise after the reduction of replacement rate in Iran’s social security system.