THE country’s federal pension bill currently exceeds Rs1tr, with Rs260bn allocated for civil servants and Rs750bn for armed forces.

Its magnitude is as staggering as its growth rate, which is outpacing the increase in revenue, making it unsustainable without holistic reforms.

As it stands, the government is spending more on pensions than the cost of running the bureaucracy.

Successive governments have tried to implement reforms to cut the pension bill with the most recent proposal being lowering the retirement age by five years from 60 to 55.

It was reported last week that a multilateral lending age­ncy had suggested the government to lower the retirement age of its employees as part of broader pension reforms.

Govt is considering a five-year cut in the age of superannuation, but experts believe the move won’t have long-term benefits

The move is estimated to save Rs50 billion every year if implemented across the board, the report had quoted anonymous officials as claiming.

The suggestion is reportedly being considered by the government, which had proposed raising the superannuation age to 62 years last year to reduce the annual pension budget.

‘Bad idea’

If such a policy is implemented, it would be against the global trend of raising the age of superannuation in line with the increased life expectancy to control public sector pension expenditures.

Experts argue that lowering the retirement age of the federal government’s civilian employees to 55 is a bad idea if the goal is to curtail the burgeoning pension payout and slow its rapid growth.

Firstly, they say, it would significantly increase the upfront costs that the government must pay when an employee reaches superannuation.

The existing pension system allows employees to commute up to 35 per cent of their pension into a lump-sum payment upon retirement.

Hasaan Khawar, an international development specialist who has done extensive work on Pakistan’s pension crisis, says lowering the retirement age “doesn’t make sense”.

The only saving resulting from this move would be a lower last-drawn salary used to calculate pension if one retires at 55, he says, adding long-term benefits would be negligible.

With employees retiring at 55, the government would have to pay pension for an additional five years, besides significantly enhanced upfront pension payouts in the form of commutation, Mr Khawa adds.

He estimates that the upfront pension payments to civilians could jump to over a trillion rupees from the current budgeted allocation of Rs260bn in five years if the retirement age is lowered to 55.

The commutation costs are already half of the annual pension budget, he says. “Lowering the retirement age will further jack up this budget.”

Former State Bank governor Dr Ishrat Hussain agrees that the cons of a lower retirement age outweigh the pros.

Dr Hussain led the pension reforms commission set up by the PTI government. In its report, the commission opposed the idea of increasing the retirement age to 62 and instead called for a contributory pension fund scheme for future hirings and parametric changes in how pension is calculated.

He cites the examples of armed forces, where the annual pension bill rises quickly because the average retirement age is 45.

“The same would happen if the age of superannuation is lowered for the civil federal employees,” he tells Dawn.

Dr Hussain favours maintaining the existing retirement age of 60 years, saying the bill could be significantly slashed if the liability is calculated as per the final basic salary without allowances and payments to the employee’s extended family are managed.

Currently, employees are allowed to draw a monthly pension double than their last salary they drew. “You exclude allowances, and you drastically control your pensions,” the former SBP chief maintains.

Both Dr Hussain and Mr Khawar are of the view that parametric reforms would help the government reduce its pension burden.

“Age is not a big issue; the many distortions are,” Dr Hussain argues.

Need for reforms

A three-part paper ‘Deferred Dreams: Navi­gating Pakistan’s Public Sector Pension Crisis’ by Mr Khawar, estimates that the federal government’s pension expense — for both civil and military employees — was Rs245bn in 2019. It grew at 9pc over the preceding three years.

Since then, the pension bill has increased to over Rs1tr for 2024-25, averaging an increase of 19pc per annum.

The burden is now projected to double every four years, a trajectory that is clearly unsustainable, he states.

An actuarial study conducted in 2021 states that the value of the defined benefit obligation for civil servant employees as of June 30, 2021, was Rs2.9tr.

The pension liabilities are largely unfunded, creating sustainability risks, the paper emphasises, adding the federal pension expenditures, including military pensions, increased more than five times in the last decade, while tax revenues grew only 2.7 times during the same period.

The increase in pension liabilities is also outpacing public revenue growth, consuming 12pc of the net revenue receipts of the federal government, up from 8.9pc a decade ago.

“Over the last decade, the federal government’s pension expenditures surged nearly 4.4 times. In contrast, the operational expenses of the civil government increased by merely 2.7 times…,” says the paper.

The fiscal year 2021-22 marked a major milestone for pension growth as the cost exceeded the expense for running the entire civil government by Rs10bn for the first time.

The disparity expanded to Rs56bn the following year, with the gap “expe­cted to keep growing”.

Likewise, provincial governments and state-owned enterprises face similar challenges.

This year, the collective pension expense for the four provinces is anticipated to exceed Rs850bn.

Pakistan Railways is already allocating a significant portion of its budget for pension payments, often surpassing the total cost of salaries to existing employees.

Approximately one-third of Pakistan Post’s budget is now dedicated to pension payments, highlighting a systemic issue across all tiers of the government.

The proponents of a lower retirement age believe that the move would result in savings and open up public sector jobs for younger individuals.

In a market like Pakistan with a large youth bulge and high levels of unemployment amo­ng the younger population, it’d ensure more jobs and foster smoother workforce transitions.

As per reports, the government is mulling to lower retirement age across all departments in phases to manage the initial surge in severance costs.

Public sector corporations, regulatory authorities, and professional councils would be instr­ucted to adopt similar retirement age reductions, officials say.

The respective entities would manage the financial cost of these reforms without reliance on federal resources.

In the last couple of years, the federal government has implemented several pension reforms, the most notable being the contributory pension fund scheme for new civil government employees from this fiscal year and for new military recruits from the next financial year.

According to the Ministry of Finance, federal employees will contribute 10pc of their basic pay while the government will contribute 20pc to the fund.

The parametric reforms introduced by the government included a revised formula for calculating pensions, penalties on early voluntary retirement, abolition of multiple pensions, changes in family pension regimes and future increase methodology, and so on.

Published in Dawn, December 9th, 2024

Header image edited using Canva Image Upscaler. It shows pensioners of Pakistan Railway, standing in a queue to draw money from a bank outside Railway Workshop, Mughalpura in October 2011. — Online/File