A Minimum Pension Guarantee Application
for the Individual Pension System in Turkey:
A Gendered Approach
S
¸ ule S
¸ ahin, PhD
Hacettepe University, Ankara, Turkey
Adem Yavuz Elveren , PhD
Fitchburg State University, USA
16 April 2015
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Outline
1. Introduction
2. Gender Inequality and Social Security
3. Minimum Pension Guarantees (MPGs)
4. Individual Pension System (IPS) in Turkey
5. The Model and Simulation Results
6. Conclusions
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Introduction
I
Gender is an important analytical category in a fast-growing
literature on social security reform (De Mesa et al. 1999; Williamson and Rix
1999; Bertranou 2001; Esping-Andersen 2002; Balcerzak-Paradowska et. al 2003; Fultz and Steinhilber
2004; Ginn 2004; Dion 2006; Sthlberg et. al 2006; Steinhilber 2006; Frericks et. al 2007 among many
others)
I
A part of this literature focuses on gender implications for
the defined contribution (DC) schemes (Korczyk 2003; Bardasi and Jenkins
2004; Jefferson and Preston 2005; Elveren 2008b)
I
Due to the gender division of labour, including unpaid family
work and informal paid work, women are less likely to have
the same level of benefits and social protections as men.
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Introduction
I
The return of individual accounts ⇒ income uncertainty at
retirement
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Minimum pension guarantee (MPG) is an appropriate tool
to address the risk of fluctuations in the economy.
I
S
¸ ahin and Elveren (2011) assesses a minimum pension
guarantee for the IPS in Turkey.
I
S
¸ ahin and Elveren (2014) discusses the role of MPG in
lessening the gender gaps in pension incomes in the IPS.
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Gender Inequality and Social Security
I
Examining the gendered structure of welfare states is of
great importance.
I
The welfare state in general and social security system in
particular reproduce inequalities through a gender-blind
structure.
I
Social security reforms often ignore the gendered outcomes
of regulatory changes.
I
It is important to consider the structural inequalities in the
labour market.
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Gender Inequality and Social Security
I
Gender inequality effects of privatization may differ but
exists to a varying extent in different countries.
I
Latin America: Women were better of before pension
reforms because social benefits were usually more generous in
traditional systems (Gimenez, 2005).
I
Central and Eastern Europe: The link between pension
benefits and lifetime earnings has been strengthened and
the redistributive aspects of pension formula has been
weakened (Steinhilber, 2006).
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Gender Inequality and Social Security
I
Lower level of full-time employment → Lower real
earnings → Smaller pension in privatized pension
schemes.
I
Women remain in the informal sector because of poverty,
lack of skills and education and employer preferences for
informal labour.
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Gender Inequality and Social Security
I
Privatization also hurts women because
I
I
they tend to be more risk-averse as investors than men
they tend to live longer than men (use of “unisex” life tables
redistribute income in favour of women)
I
The penalty for early retirement is higher in the private
pension schemes than in the traditional PAYG system
I
Retirement age for women was about five years lower than
that of men in many countries. However the recent reforms
have either shortened the retirement age difference or lifted it.
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Minimum Pension Guarantees
I
Some implementations in public pension systems that favour
women as a major part of the total poor:
I
Minimum Pension Guarantee (MPG): is a promise by
government or pension fund management that at retirement
the annuitized benefit will be above a prespecified minimum
level.
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Minimum Pension Guarantees
I
Two main pension guarantee implementations:
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Minimum rate of return: entitles participants to receive
payments at least equal to their lifetime contributions to the
system plus some rate of return
I
Minimum benefit garantee: provides a minimum annuity
regardless of actual investment performance of individuals’
accounts (Lachance and Mitchell, 2003)
S
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¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Minimum Pension Guarantees
I
I
Actuarial vs Social Perspective
From actuarial perspective
I
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DC plans are not designed to help redistribute income
not rational to transfer income from men to women by using
gender-neutral mortality tables
From social perspective
I
I
I
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the reproductive role of women in social life
immense unpaid work prevents women from participating in
the formal labour market for a longer period
discrimination against women in the labour market in terms
of segregation and wage level
part-time jobs, low-paid sectors, shorter contracts,
intermittent work lives
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Minimum Pension Guarantees
I
We argue that MPG should be used in private pension
schemes
I
I
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unpaid work of women should be priced by some income
transfers
a way to create solidarity between men and women
Chile case - the state partly finances the MPG
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Individual Pension System (IPS) in Turkey
I
IPS was introduced as a complement to the public pension
system in 2003.
I
Participation is voluntary and benefits aim to provide
supplementary retirement income
I
Tax incentives and state contributions
I
Retirement age is 56 and minimum period of contribution is
10 years
I
Increase in pension savings, contribution to the development
of the economy and capital markets
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Individual Pension System in Turkey
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Individual Pension System in Turkey
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
Bozku¸s and Elveren (2008) and S
¸ ahin et al. (2010)
analysed the gender gap in the contribution amounts into
the IPS based on the actual data and showed that the overall
gender gap in regular contributions is negligible.
I
S
¸ ahin and Elveren (2011) introduced a model for MPG in
the current IPS in Turkey following Lachance and Mitchell
(2003).
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
S
¸ ahin and Elveren (2014) carries the discussion one step
further by analysing the MPG considering the gender
dimension of the IPS.
I
The participant is eligible for the guarantee if the
accumulated amount < the guaranteed amount.
I
Develop models for risk-free rate, bond returns, stock
returns, GNP
S
¸ ule S
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A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
We assume that
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the IPS is extended to cover whole population
the state is the final guarantor
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The minimum guarantee is the minimum wage in Turkey
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US CSO (Commissioners Standard Ordinary) 1980 mortality
tables
S
¸ ule S
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A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
Risk-free rates and bond returns ⇒ Vasicek model
drt = a(b − rt )dt + σdWtr
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Stock returns ⇒ ln(1 + St ) = rt + µs + σs Zt
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Investment returns ⇒ Rt = αSt + (1 − α)Bt
S
¸ ule S
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A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
Wage increase ⇒ wt = gt−1 + p (rate of change in real
GNP and promotional salary increase (1%))
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Change in GNP ⇒ ln(gt + 1) = µg + σg Zt
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Annual increase in minimum wage (GT ) is 6%
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Data ⇒ Household Budget Survey, Capital Markets Board of
Turkey, Borsa Istanbul (Istanbul Stock Exchange), the State
Planning Organization and the Turkish Statistical Institute
S
¸ ule S
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A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
Ct = CWt (1 − E )
C : fixed contribution rate (10%)
Wt : the wage of the employee in real terms in year t
E : the administrative expenses
I
The value of the individual account at retirement, IAT
IAT =
T
−1
X
t=0
Ct
TY
−1
(1 + Rj )
j=t
Rj : the portfolio investment rate of return in year t
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
I
No guarantee is paid if IAT > GT
I
If IAT < GT
then the guarantee payoff is
fT = max(0, GT − IAT )
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
Table : Cost Estimates: As a Percentage of Individual Account Amounts (Regular
Contribution Rate=10%)
Scenario 1
%8
Male
Female
Scenario 2
%6
Male
Female
Scenario 3
%4
Male
Female
Guarantee Growth Rate (GGR)
Years of Contribution
Portfolio invested 100% in bonds
10 years
20 years
30 years
378.36
82.08
58.19
1048.54
312.39
82.27
296.8
25.29
0
852.72
183.76
4.03
227.98
0
0
687.48
93.86
0
Profolio invested 50% in bonds,
50% in equities
10 years
20 years
30 years
122.49
0
0
434.19
0
0
84.55
0
0
343.11
0
0
52.55
0
0
266.26
0
0
Profolio invested 100% in equities
10 years
20 years
30 years
6.43
0
0
155.55
0
0
0
0
0
111.98
0
0
0
0
0
75.21
0
0
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
Table : Probability of Guarantee Payoffs (Regular Contribution Rate=10%)
Scenario 1
%8
Male
Female
Scenario 2
%6
Male
Female
Scenario 3
%4
Male
Female
Guarantee Growth Rate (GGR)
Years of Contribution
Portfolio invested 100% in bonds
10 years
20 years
30 years
1
0.9503
0.8753
1
0.9995
0.9153
1
0.7767
0.5302
1
0.9952
0.6397
1
0.4471
0.1578
1
0.9622
0.2322
Profolio invested 50% in bonds,
50% in equities
10 years
20 years
30 years
0.9076
0.5768
0.4968
0.9792
0.7667
0.5245
0.8807
0.4741
0.3719
0.9705
0.6886
0.4027
0.8457
0.3639
0.2496
0.9582
0.5935
0.2823
Profolio invested 100% in equities
10 years
20 years
30 years
0.8464
0.6566
0.6430
0.9280
0.7704
0.6591
0.8225
0.5957
0.5716
0.9144
0.7221
0.5907
0.7928
0.5286
0.4880
0.8954
0.6672
0.5098
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
Table : Cost Estimates: As a Percentage of Individual Account Amounts (Guarantee
Growth Rate=6%)
Scenario 4
Cont. Rate=10%
Male
Female
Scenario 5
Cont. Rate=8%
Female
Scenario 6
Cont. Rate=6%
Female
Years of Contribution
Portfolio invested 100% in bonds
10 years
20 years
30 years
296.8
25.29
0
852.72
183.76
4.03
1090.91
254.7
30.04
1488.87
372.93
73.39
Profolio invested 50% in bonds,
50% in equities
10 years
20 years
30 years
84.55
0
0
343.11
0
0
453.89
0
0
638.52
0
0
Profolio invested 100% in equities
10 years
20 years
30 years
0
0
0
11.98
0
0
164.97
0
0
253.3
0
0
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
Table : Probability of Guarantee Payoffs (Guarantee Growth Rate=6%)
Scenario 4
Cont. Rate=10%
Male
Female
Scenario 5
Cont. Rate=8%
Female
Scenario 6
Cont. Rate=6%
Female
Years of Contribution
Portfolio invested 100% in bonds
10 years
20 years
30 years
1
0.7767
0.5302
1
0.9952
0.6397
1
0.9990
0.7836
1
0.9997
0.9024
Profolio invested 50% in bonds,
50% in equities
10 years
20 years
30 years
0.8807
0.4741
0.5716
0.9705
0.6886
0.5907
0.9801
0.7369
0.6203
0.9889
0.7926
0.6539
Profolio invested 100% in equities
10 years
20 years
30 years
0.8225
0.5957
0.5716
0.9144
0.7221
0.5907
0.9311
0.7518
0.6203
0.9494
0.7842
0.6539
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
The Model and Simulation Results
Table : Comparison of the Guarantee Costs and the Probability of Guarantee Payoffs
Years of Contribution
Portfolio invested 100% in bonds
10 years
20 years
30 years
Cost Estimates
(as a % of the IA Amounts)
Male
Female
Female *
Probability of
Guarantee Payoffs
Male
Female
Female*
296.8
25.29
0
852.72
183.76
4.03
345.83
40.76
1.45
1
0.7767
0.5302
1
0.9952
0.6397
1
0.8547
0.6220
Profolio invested 50% in bonds,
50% in equities
10 years
20 years
30 years
84.55
0
0
343.11
0
0
107.36
0
0
0.8807
0.4741
0.3719
0.9705
0.6886
0.4027
0.8975
0.5044
0.3975
Profolio invested 100% in equities
10 years
20 years
30 years
0
0
0
111.98
0
0
0
0
0
0.8225
0.5957
0.5716
0.9144
0.7221
0.5907
0.8391
0.6134
0.5864
S
¸ ule S
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A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
Conclusions
I
Women would be more likely than men to receive pension
subsidies
I
Women would require larger pension subsidies
I
Findings indicate that there will be a remarkable gap
between men and women in earnings in the IPS
I
Minimum pension guarantee can be used as a way to
decrease this gap
S
¸ ule S
¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach
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I
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S
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¸ ahin
A Minimum Pension Guarantee Application for the Individual Pension System in Turkey: A Gendered Approach