Pension problems

The State Bank of Pakistan has recently directed commercial banks to follow SOPs for pension payments. These SOPs require pension payments through a direct credit system. Though the changes made to the SOPs by the government are aimed at bringing transparency and ease through the direct credit system, there are other aspects of the entire pension system that need our attention. Without looking at the broader picture, some cosmetic changes are not going to make much of a difference. We need to keep in mind the problems of the elderly and also the collective responsibility that any society has to fulfil. With the new system in place, all government pensioners shall be required to undergo biometric verification through a bank maintaining their pension accounts. This verification will be done twice a year, in March and then in September – irrespective of the location or age of the pensioner. The public-sector pension system has been in need of major reforms for long, and pension expenditure has risen sharply over the past two decades. As we enter the third decade of the 21st century, the system needs to align itself with modern technology and also with the aging population.

At the turn of the century over 20 years ago, average life expectancy in Pakistan was much lower than it is today. The increase in longevity is good for the people but they need the state to take care of them. That means a universal system of old-age benefits should be offered to all citizens even if they were not in government jobs. Rather than expanding the old-age benefits to all, successive governments in Pakistan have been more focused on pensions to former state employees and even that the government declares unsustainable. The overall pension spending as a share of tax revenue has reached around 19 percent which is almost double the level a decade earlier. As the duration of pension support is increasing by the year, the post-retirement period has extended to as long as 25 to 30 years. This requires a much better investment system so that the rate of return also increases as the amount accumulates. Currently, we are witnessing lower-than-expected investment returns as the interest rates have declined.

All this is likely to lead to a further funding shortfall that needs to be tackled diligently for the benefits of our elderly population. The suggestion by the SBP that the retirement age be increased makes perfect sense to reduce the average coverage period of retirement benefits. As of now, there are two eligibility criteria for retirement. A government employee may retire after qualifying service of 25 years or cross the threshold of 60 years of age. If an employee joins government service in their early 20s they end up completing their 25 years on the job in their mid- or late 40s becoming eligible for early retirement. Since the retirement age has already been increased in many other countries, it is worthwhile to consider this option. An increase of two to three years in qualifying service and in retirement age may be beneficial not only for employees but also for the government. If the government is able to reduce the strain of pensions, it will probably be in a better position to focus on the problems of other elderly people who are not government employees.