Economic and Political Determinants of Pension Indexation in Iran

Pension indexation against inflation is crucial, especially in Iran with high and persistent inflation. Pensions worldwide are mainly adjusted automatically based on a definite indexation rule, but in Iran, it is provided by a considerable discretionary power of government. Hence, the study of economic and political determinants of pension indexation in Iran is critical and interesting.

This study using Iran’s Social Security Organization (ISSO)’s data of pensions paid from 1340 (1960) to 1396 (2018) computes annually the actual pension indexation rate and explains it in a OLS model.

The incomes of ISSO, other expenses like the cost of hospital and medical services, population dependency ratio, the minimum wage, economic (GDP) and political cycles (presidential and parliament elections) have great influences on the discretionary rate of pension indexation in Iran. Old-age pensions in Iran are partly indexed against inflation with a ratio of 0.6, although in the years before presidential elections, pensions are indexed with a ratio of 1.23 above the inflation.

Pensions in Iran become eventually inadequate and retirees’ life are affected by political cycles as a result of indexation without a defined rule. The results show that ISSO’s pensions are provided effectively in a Pay-as-you-go system where dependency ratio and the contribution base are the most influential factors. Pensions were positively related with minimum wage and negatively with the country’s GDP showing that these welfare expenditures are countercyclical and act as an automatic stabilizer.