Mandatory Pension Systems in the Middle East and North Africa
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Figure 3.14 Internal Rate of Return and Enrollment Age in the SSO in the Islamic Republic of Iran and the RSNA in Tunisia RSNA (Tunisia)
10 9 8 7 6 5 4 3 2 1 0
Internal rate of return (percent)
Internal rate of return (percent)
SSO (Islamic Rep. of Iran)
45
50
55 60 Retirement age
Enrollment age = 25
65
70
Enrollment age = 30
10 9 8 7 6 5 4 3 2 1 0 45
50
55 60 Retirement age
Enrollment age = 35
65
Enrollment age = 45
Source: Authors‘ calculations. Note: Refers to males, earning the average wage, married, and retiring at various ages. Mortality tables are sex and country specific.
In all pension schemes, there are implicit transfers from young to old workers, regardless of the level of income, as the IRR is allowed to vary by the age of enrollment in the system. In the Islamic Republic of Iran, for instance, a 25-year-old male entrant who retires at age 60 will receive a 4 percent real rate of return on his contributions, a 30-year-old male entrant will receive 5.5 percent, and a 45-year-old male entrant will receive close to 6 percent (see figure 3.14). In Tunisia, the differences are even more striking. The 25-year-old male entrant retiring at age 60 will receive a 5.5 percent real rate of return, while the 35- and 45-year-old entrants will receive 7 and 9 percent, respectively. There are various reasons for this pattern. First, when the accrual rate is too high relative to contributions, for a given retirement age, older individuals with shorter vesting periods benefit from a higher IRR.12 Second, when accrual rates are not constant over the contributory period, (meaning that they are higher for the first few years of contributions) older workers usually receive higher replacement rates for the same vesting period and thus a higher IRR. This type of accrual rate is used in Morocco’s CNSS and in all Tunisian pension funds. Third, the ceilings on the replacement rates tend to penalize young workers with a longer career. Minimum pensions can also increase the IRR of older workers with a shorter vesting period, regardless of their level of income. Minimum vesting periods have been introduced to mitigate these problems, but at the risk of reducing incentives for enrollment among older workers. In Djibouti, for instance, where the vesting period is set at
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