Pricing of participation option in Iran's Social Security Organization (ISSO)'s pension fund

Subject Areas : Labor and Demographic Economics

abbas khandan ¹ , Erfan Salavati ²

1 - Faculty of Economics, Kharazmi University.
2 - Department of Mathematics and Computer Science, Amirkabir University of Technology

Received: 2022-03-15 Accepted : 2022-09-06 Published : 2022-06-20

Keywords: Pricing, European option, American option, participation in pension funds,

Abstract :

Collective pension schemes with mandatory participation, despite their many benefits, are not commensurate with the future of work so that recently granting exit option has been considered in pension reforms. However, there are concerns about the consequences of granting exit option on sustainability of the plans. This study based on the main characteristics of Iran’s Social Security Organization (ISSO)’s pension fund, mathematically calculates the value of participation in this plan. It was assumed that contributors are allowed to opt out once at a given time (European option) or several times during employment (US option) and, then, the option pricing theory is used to determine the value of these options. Findings show that in both cases of European and American options, the incentive to leave generally is low at old ages and they prefer to stay and receive their entitled pension annually. In contrast, young people have less incentive to participate because they know that they are the ones who have to pay the high recovery contributions necessary to fill the deficit. However, it was shown that even young people are willing to accept a deficit (between 30 and 40 percent) because in case of participation, they would benefit from investment returns of their predecessors’ funds or other benefits of collective schemes including interpersonal and intergenerational risk sharing. The results also show that in case of American option, people have always higher participation incentive and its exit threshold is always lower than the case of European option.

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