An intergenerational optimization analysis of alternative deficit reduction strategies for the pension system in Turkey

Abstract

The publicly managed pension system in Turkey is currently run by the pay-asyou-go (PAYG) scheme, using contributions out of wage/salary incomes of currently active workers to finance pension benefits to retirees. The expenditure-revenue balances of a PAYG-based scheme are determined by the existing configuration of system parameters: the contribution rate which defines the rate at which a worker’s payroll/wage is contributed to the pension scheme; the replacement rate which defines the rate at which average income earned during the working phase of life cycle is replaced by the pension income, and the entitlement age which controls the relative sizes of workers and retirees covered. After the system began to generate huge losses starting from the first half of the 1990s, the government was forced to introduce a parametric reform act in 1999 so as to curb pension deficits by adjusting the values of pension parameters. This thesis considers SSK, the largest pension fund in Turkey, and develops a numerical optimization framework in order to identify the configurations of pension parameters that i) will minimize the deterioration in the economic well-beings of the generations that will face reform parameters, relative to the economic well-being of generations that faced/will continue to face the pre-reform parameters and ii) maintain, at the same time, the actuarial balance of the system over 1995-2060 period. The results indicate that even the optimal configurations imply a radical deterioration in the level of economic well-being of the generations that will face reform parameters relative to the level implied by the pre-reform configuration.