KARACHI: Public sector pension expenditure has risen sharply over the past decade and the unfunded nature of pension payments in the country is making the current structure unsustainable, the State Bank of Pakistan said in its first quarterly report of FY21.

The overall pension spending as a share of tax revenue has reached 18.7 per cent as of FY20, almost double the level a decade earlier.

Specifically, the pension expenditure at the federal level has risen by 18pc in the country during FY11-21. Provincial pension expenditure has also witnessed a similar surge. Within consolidated pension expenditures, civil pensions (including federal and provincial) constituted 63.2pc, whereas military pensions made up around 36.8pc on average during the last five years.

The report said this increasing pension burden is mainly because of two factors; increases in life expectancy extending the duration of pension support and lower-than-expected investment returns (owing to very low interest rates, for instance) that could further lead to a funding shortfall.

Says spending rose to 18.7pc of tax revenue during the last decade

The higher pension amount could result in crowding out other valuable spending avenues; “pension spending as a percentage of total budgeted expenditures for FY20 exceeded health and education spending on both federal and provincial fronts and is almost half the level of consolidated development expenditures.”

In this regard, international financial institutions such as the World Bank and the International Monetary Fund have also started flagging the rising expenditure as a pressing concern for the country’s debt sustain­ability, said the SBP.

According to the World Bank’s projections, civil ­service pension payments would overtake wage expenditures by 2023 and 2028 in Punjab and Sindh respectively and come near to their level in the federal government by around 2050.

“It is important to mention that structural factors, such as the size of the civil government and the military, the unfunded nature of pensions, and disproportionally high share of non-gazetted employees (95.3pc of total federal government employees), are all important factors governing the overall level of pension expenditures in the country,” said the report.

In its current form, the pension structure can be classified as pay-as-you-go (PAYG) under which the government guarantees pensions and other retirement benefits to employees who do not make personal contributions from their salaries.

Over the past few years, government employees have been retiring early in large numbers. As of January 2019, the month for which the latest data is available, more than 60pc of all new retirees in Punjab were below the age of sixty, and the ratio was 67pc for employees retiring from grade 16 and lower.

Early retirements are rising due to three major reasons: for instance, a representative grade-16 employee who retires at superannuation in 2020 is entitled to receive 158pc of their last gross pay. However, if the same employee retires at the age 55 or 50 (in 2010 or 2015), the pension would have been more than 200pc.

The report said the increase in family pension has burdened the economy. For instance, in Punjab, family pension has increased from Rs3.5 billion in FY11 to Rs28.6bn in FY19. Similarly, in Sindh, the survivor payment had reached Rs16.7bn in FY18.

“It is pertinent to mention here that the retirement age of 60 years is already markedly lower than many other countries,” said the report adding that the delayed retirement age will support in increasing the contribution period once the government opts for a funded system in the subsequent round of reforms.

The SBP suggested a number of policy measures to reduce the burden of pensions on fiscal space.

Published in Dawn, January 7th, 2021