AN INTERGENERATIONAL OPTIMIZATION ANALYSIS OF ALTERNATIVE DEFICIT REDUCTION
STRATEGIES FOR THE PENSION SYSTEM IN TURKEY
Baris ÇiFTCÝ (Bilkent University)
Serdar SAYAN (Bilkent
University)
The publicly managed pension system in Turkey is currently run by the
pay-as-you-go (PAYG) scheme, using contributions out of wage/salary incomes of
currently active workers to finance pension benefits to retirees. The amount of
contributions per active worker is determined by multiplying the wage/salary
income with applicable contribution rates, whereas the amount of retirement
income collected by each retiree is calculated by using replacement rates that
tie pension payments to wages/salaries earned prior to retirement. The relative
sizes of workers and retirees covered are controlled through entitlement ages
set by policy makers. 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. The major step taken in this direction was a
gradual increase in entitlement ages. Yet, the Constitutional Court ruled, in
response to an appeal by the opposition parties in the Parliament, that the way
entitlement ages were gradually increased over time violated the Constitution's
fairness criterion, and required a new scheme be introduced to raise minimum
statutory age for collection of pension benefits.
This paper considers SSK, the largest pension fund in Turkey, and develops a
numerical optimization framework in order to identify the configurations of
three parameters that imply the most equitable distribution of the burden of
reform among generations, while minimizing the intertemporal deficit that SSK is
expected to incur over the 2000-2060 period. The resulting configurations are
then compared to the parameters introduced in 1999 in terms of their
implications for intergenerational distribution of the burden of
reform.
