KARACHI: The current pension system in Pakistan suffers from low contribution rates, making it unsustainable in the long run, said Asian Development Bank (ADB) Senior Economist Aiko Kikkawa at a media briefing in Georgia when the bank released the report “Aging Well in Asia”, earlier this month.

Contribution can only be sustainable if everyone has the same form of relief and the working-age population contributes across the board, she said in answer to a query regarding the country’s pension conundrum. For this, the private sector needs to merge with the public sector in terms of contributions, she added.

The national pension cost is expected to reach almost Rs2 trillion in FY24 and rise to R10tr in the next decade if no reforms are implemented. This is up from just Rs25bn in 2002-03 to over Rs1.5tr over the span of 20 years.

An earlier report by the ADB highlighted Pakistan’s weak pension and security systems. Most government positions entail unfunded pensions, where pensions for current employees are financed through tax revenues, according to the report “Strengthening Pakistan’s Pension and Insurance Systems.”

Annual cost reaches Rs2tr in FY24 which will rise to R10tr in next 10 years

On the other hand, funded pensions are available for certain private sector workers and members of organised labour unions. However, a significant portion of the population lacks pension coverage and relies entirely on the support of extended family networks.

Stakeholder discourse around pensions is generally focused on its impact on Pakistan’s fiscal position and the country’s limited ability to finance the growing burden of pensions. Its purpose, to support the elderly at an older age, gets buried amid concerns about the lack of resources to fund it sustainably.

While a contributory programme is typically the initial stage in establishing a fledgling pension system, extending its reach beyond public sector and formal private sector employees poses a considerable challenge in the region, says the ADB report, while emphasising the importance of protecting the older generations. The prevalence of informal employment significantly limits the coverage of contributory pension systems.

According to the ADB report, in Pakistan, the working-age population participates in contributory pensions at a mere 7pc, compared to 18pc in Sri Lanka and 15pc in India.

While the reports’ authors Ms Kikkawa and ADB Chief Economist Albert Park acknowledged that there were no easy answers in a country like Pakistan going through a debt crisis to finance large pension programmes, they added that a way to make the pension system more sustainable was to have automatic adjustments to respond to changing economic conditions.

However, one drawback to this system is that a crisis might lead to too low adjustments relative to the population’s needs. “It is about smart design and making smart investments,” said Mr Park, alluding to the need for a contributory pension system.

Informal sector

Pensions are nonexistent in the informal sector, which employs a significant portion of the workforce. Informal employment of older people has been particularly problematic as 81pc of those aged 60 and above said that their income has been diminished by Covid-19, according to the report. In agriculture, the share of older workers exceeds a staggering 50pc, says ADB.

Mr Park said technological innovations through digitalisation could help Pakistan’s pension systems, giving India as an example. The biometric ID in the India Stack, which uses the biometric Aadhaar national ID to link ID, personal authentication, and payments while protecting data privacy, has halved internal fraud and leakage in India’s pension systems. Such initiatives could be introduced even for Pakistan’s older illiterate rural farmers if a contributory social pension system exists.

However, there are several big ‘ifs’ attached to increasing pension coverage through technological innovations. Such applications would only become applicable if the informal sector was part of the formal sector and provided social pensions, which are not currently on the cards.

Pakistan has a relatively low share of older people in the population. Even by 2050, Pakistan will still have a share of less 10pc of older people (60-year plus), as per the ADB report.

Published in Dawn, May 19th, 2024