The ‘pension bomb’ in the making

ISLAMABAD: Federal government is considering introducing a contributory pension scheme to bring under control its fast rising pension bill that will soon be more than the salary bill of the civilian employees.

Termed by a source as a fast emerging “pension bomb”, which is feared to explode if the present pension system is not reformed and revised. The situation in Punjab and Sindh is said to be worse.

The government has already appointed a pay and pension commission, which has been tasked to study the contributory pension system for a possible shift from the present scheme, which, with every passing day, is adding burden to the public kitty.

The estimate for next year’s pension bill is around Rs470 billion for employees of the federal government. The salary bill for employees is presently around Rs700 billion and in case of any increase in the next budget both the pension and salary bills will increase.

According to media reports, the IMF expects Pakistan to freeze, if not reduce, the expenditure for salaries and pensions, running of the civil government, security, subsidies development. “The argument is that the country was seeking debt relaxation from developed countries, which had in fact cut their own salary bills by 1-2 percent and expect the beneficiary nations to reciprocate by belt tightening,” a report said.

IMF is keen to keep a check on non-debt servicing expenditure of the country and the government itself is alarmed over the rise in its salary and pension bill. It is said that only one percent increase in the salary and pension bill will cost over Rs10 billion to the federal government alone.

Sources said that under the contributory pension proposal, the government will provide seed money for a pension fund that will also have the contribution from the government employees. Such a fund is usually invested in stocks and shares, along with other investments, with the aim of growing it over the years to pay the pension of the retiring and retired officers.

Financing methods for such a scheme are in general of two types. Pay-As-You-Go mechanism and Fully-funded mechanism.

In the pay-as-you-go pension system, current workers make contributions based on their current earnings. The contributions collected through this system are instantly used to pay pensions to current retirees. The government only makes a promise to current workers who make contributions that it will pay benefits related to these contributions when the workers become eligible for pension.

In the fully-funded pension system workers make contributions to their own accounts. In this system, workers’ contributions are invested rather than paying pension to current retirees. The investment earnings are an essential part of benefits finally paid to workers. These investments can be administered by a monopolistic public agency or competitively with the involvement of the private sector.

Recently the Prime Minister’s Adviser on Reforms Dr Ishrat Husain had also told The News that the rising pension bill is a serious cause of concern for the government, which has appointed a Pay and Pension Commission. He added that the Commission would present recommendations for pension reform moving away from pay as you go to defined contribution and creating a Pension Fund. This would not only save the government from future fiscal burden but would also help in deepening the capital markets in Pakistan, he said.