Simulation of Benefits and Risks after the Planned Privatization of the Pension System in Turkey: Is the Expected Boost to Financial Markets Feasible?

The recently started process of social security reform in Turkey is widely argued to have a significant potential to affect the direction of further development of financial markets in the country in the years ahead, particularly through the planned introduction of privately managed defined-contribution (or money purchase) retirement plans. This paper aims to evaluate the prospects for the emergence and growth of a demand for these plans by analyzing investment risks and associated benefits facing employees purchasing them and to assess the effectiveness of various risk-reduction strategies that might be pursued by individuals as well as the government. Within this framework, a money purchase pension plan, supplementary to the basic state scheme, is considered. Possible variations in a member's pension income, arising due to stochastic increases in salary earnings and investment returns under alternative portfolios, are captured using an actuarial simulation model designed for this purpose. The cost to the government of providing guarantees on minimum pension incomes and the effects of changes in individuals' investment strategies, retirement ages, and career patterns on the retirement benefits obtained are investigated, and the results are related to various aspects of social security reform–financial market interaction in Turkey.