Recently, Prime Minister Imran Khan said that rising pension bill is a far more serious problem for the government than the power sector debt. It is a fact that unfunded pension liabilities are ballooning and will become financially untenable if not contained. In a limited budget, it is already crowding out development. The pension bill in Pakistan is big but its impression of being overblown is said to be overstated. Presently, there is a lot of confusion regarding pension reforms and changes made in Directory Retirement Rules due to which many civil servants are contemplating early retirement.
The pension bill at all tiers of government is already equivalent to the wage bill. With new pensioners joining the ranks at a pace many times faster than that of people exiting the pension rolls, it is expected to rise vertically in the years ahead. On average, a person who served in government for 25 years or more draws a pension until they turn 80. Technically, the pension ought to be 70% of the last drawn basic salary at the time of retirement. But after including the raise granted by successive governments for years before a person retires, it turns out to be 122-140% of their last drawn basic salary.
The pension bill of the officers of Grades 19-22 is about 25-30 percent of the total. Currently, there are 27,000 officers against 0.6 million lower-grade federal government employees. Pension liabilities of the defence services are almost triple the size of the pension bill of civil servants because of a variance in retirement rules and the qualifying age of retirement. According to 2020-21 budget documents, the defence pension bill is Rs325 billion against Rs111 billion for the civilian side.
The share of government jobs in the workforce was 7.5% in 2014, according to the World Bank, against 15% in China, 21% in the United Kingdom and 35% in the United States. The pay and pension bills as a percentage of GDP are also less than those in most countries. Pakistan’s consolidated federal and provincial pension obligations are estimated to have reached Rs1 trillion for the current financial year, or equal to a quarter of the total taxes collected by FBR last fiscal. The data shows that the annual federal pension payments of Rs470 billion, which mostly consisted of military pensions and excluded retirement benefits paid by SOEs to employees, have grown close to the annual wage bill.
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Multiple factors have contributed to the exponential growth in the pension payments of the government in recent years: a) the public sector’s growing size; b) increase in life expectancy; c) a skewed unfunded public pension system that lets children and grandchildren of retirees draw pension payments; and d) hikes in pension benefits to offset the impact of inflation. Various efforts in the last couple of decades have resulted in minor changes, with no significant shift in the existing unfunded, pay-as-you-go defined retirement benefits scheme or reduction in the liability. The purpose of future reforms should be to stop growth in the government’s pension-related liabilities, reduce the present pension bill and restructure the system on a self-sustaining model.
Different countries have successfully adopted different models in order to avoid the dangers associated with the pay-as-you-go-based pension system in recent years. One is the shift from the current unfunded defined pension benefits to a fully funded, defined contributory pension scheme with the government guaranteeing a minimum monthly income after retirement. Whatever model is adopted, the long-term focus should be to ensure post-retirement income security for government employees while reducing the burden of pension payments on the budget.
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]