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

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 oflifetime 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.