Prospects for Private Pension Systems and their Relation to the Stock Market in Turkey

Mahir Fusunoðlu

Istanbul Stock Exchange Review, 1998, vol. 2, issue 8-7, 90-104

Abstract: The pay-as-you- go pension system is one of the most costly program funded by the Turkish government in the recent years. The Treasury has supported the system with increasing rates since 1992. The total support accounted for one-fourth of the budget deficit in 1995 and one-third in 1996 and 1997. These deficits are almost the same amount as investment expenditures undertaken by the government. Despite this alarming situation, social security and social services in general are at low and insufficient levels. Neither people nor the government is pleased with the existing system. Even based on conservative assumptions, the cost shows a clear tendency to increase in the future, both in absolute terms and as a percentage of GDP. Indeed, should the present system continue with the existing premiums (21.5 percent for Sosyal Sigortalar Kurumu -SSK "Social Security Administration", 35 percent for Emekli Sandy?y "Pension Fund" and 20 percent for Ba?-Kur "Self-Employers Security Administration"), these three systems will have a total deficit/GDP ratio of 2.7 percent in 2000, 3.45 percent in 2005, 4.31 percent in 2010, 5.58 percent in 2020, 6.98 percent in 2030, and 10 percent of GDP in 2050 on the basis of 1995 prices. The goal of this study is twofold: i) A short analysis of the existing pension system in Turkey, and ii) investigating the possibility of the private pension system on a complete or partial basis. Nevertheless, it should not be seen as an offer for a completely new system. There are three main observations: • The pay-as-you- go system is diverted toward bankruptcy system, (i.e., an incapability to supply the promised benefits out of its own resources). • A new system of private Pension Saving Accounts (PSA) is superior to the present system, both for workers and society as a whole. • A gradual transfer of the system from the present system to PSA is possible. In order to elaborate observation (a) above, a critical analysis of the present system is necessary. There are a number of exogenous parameters, such as population projections, the growth rates of employment, GDP, and real wages. A conclusion has been reached that the present system is not viable, in particular, with regard to maintaining contributions and benefits. As wages and salaries increase, contributions made by the active participants have also increased. Moreover, higher wages and contributions mean bigger pensions in the future. The possibility of the Turkish pension system to carry this heavy burden is questionable. Alternatively, it is possible to make adjustments to the present pension system and to reduce deficit, which will require higher contributions from the existing members, extension of the retirement age, including workers who are not in the system or lowering benefits for future pensioners. These adjustments are unlikely to reduce the deficit and to slow down the rate of increase.

Date: 1998
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