PRIME MINISTER Imran Khan has described the government’s rapidly increasing pension bill as a far more serious problem than the huge power-sector debt. That might sound a bit exaggerated at a time when the government continues to make its pension payments but appears unable to liquidate the circular debt. However, the time is not far off when the ballooning pension expenditure will become our biggest budgetary challenge, further squeezing the space for development unless, as Mr Khan rightly asserted at a recent cabinet meeting, it is tackled quickly. The federal and provincial pension liabilities are already becoming fiscally unsustainable. For example, the country’s consolidated federal and provincial pension obligations are estimated to have reached Rs1tr 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 Rs470bn, which mostly consisted of military pensions and excluded retirement benefits paid by SOEs to employees, have grown close to the annual wage bill. Similarly, at the provincial level, Punjab has booked an expenditure of Rs250.7bn, or just Rs15bn less than what it spent on development last year, for pension payments during the ongoing fiscal. Punjab’s pension budget has spiked by an annual average of 24.1pc since 2011. The story in the other provinces is not much different. If the current state of affairs is allowed to continue, the entire pension system will become insolvent.

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. Mr Khan also hinted at hiring a foreign consultant to suggest pension reforms. It is not for the first time that a government has enunciated its plans to address the challenges posed by an unsustainable public pension system. 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.

Published in Dawn, August 20th, 2020