Current revenue footing bill of rising pensions to be unsustainable

ISLAMABAD: Pakistan’s pension bill has gone up by 92 percent at the federal level while it ballooned in the range of 78 to 113 percent among the four provinces during the last five years, indicating that this monster was increasing at a supersonic speed, making it unsustainable.

“Both nominal and real pension burdens have seen an increasing trend. The amount of federal pension has increased around 18pc annually in real terms (Economic Survey of Pakistan, 2020). 

Over the past five years, all the provinces have seen growth in annual pension bill ranging from 78-113pc,” it was the crux of the report titled “Government Pension and Fiscal Sustainability” prepared by Foreign Commonwealth and Development Office (FCDO)’s Sustainable Energy and Economic Development (SEED) Programme in collaboration with the Sustainable Development Policy Institute (SDPI) for the PTI led provincial KP government.

The pension bill at the federal level has gone up from Rs245 billion allocation in the fiscal year 2016-17 to Rs470 billion in the last fiscal year 2020-21, registering an increase by 92 percent in the last five years.

For the ongoing fiscal year 2021-22, the federal government had allocated Rs480 billion for payment of pension liabilities but earmarked another bloc allocation of Rs160 billion for providing 10 percent ad-hoc allowance over and above 25 percent disparity allowances and 10 percent hike in pension. So, the total pension bill is expected to go up to Rs520 billion in 2021-22.

In Punjab, the pension bill has been increased from Rs141 billion in 2016-17 to Rs250.7 billion in 2020-21, so it registered an increase by 78 percent in the last five years. The pension liabilities have gone up from Rs70 billion in 2016-17 to Rs145.1 billion in 2020-21, so it went up by 107 percent. In Khyber Pakhtunkhwa, the pension bill increased from Rs47.4 billion in 2016-17 to Rs86 billion in 2020-21, registering an increase by 82 percent.

In Balochistan, the pension bill has increased from Rs17.9 billion in 2016-17 to Rs38.2 billion in 2020-21, so it went up by 113 percent.

Khyber Pakhtunkhwa’s pension bill had grown from 3pc of the provincial budget in 2009-10 to nearly 10pc in 2019-20. In absolute terms, this reflects growth by a factor of 10, from Rs7.2 billion to Rs74 billion over the same period.

The report states that pension-related spending in Pakistan is increasing at a rapid pace. A number of factors are fueling this phenomenon: ad hoc and retrospective increments in pensions and wages from the government, early retirements, high replacement rate, commutation and restoration facilities to pensioners, and substantial survivorship benefits. With the increase in average life expectancy, medical expenditures, and the recent hike in inflation, nominal pensions are bound to increase further, given demand-side pressures.

These trends are not nationally exceptional. The current expenditures of the federal government on superannuation allowances and pension increased from Rs421 billion in FY2019-20 to Rs470 billion in FY2020-21.

And these figures do not include the pension expenditure of provincial governments and some state-owned enterprises. For example, Pakistan Railways needed around Rs6 billion in March 2021 to clear the outstanding pensions payable to its retired workers.

Both nominal and real pension burden have seen an increasing trend. The amount of federal pension has increased around 18pc annually in real terms (Economic Survey of Pakistan, 2020). Over the past five years, all provinces have seen growth in annual pension bill ranging from 78-113pc.

The allocation towards pension is fiscally unsustainable as it is being financed by current revenue. Adequate funds are not being set aside to meet future liabilities as they accrue i.e. a Pay-As-You-Go model of financing pension schemes is the prevailing policy approach by GoKP, other provincial governments and the federal government in Pakistan. Pension expense as a proportion of salary expense has grown from 31pc in 2013-14 to 41pc in 2019-20. According to one independent estimate, at the current growth rate in pension expenditures, 56pc of the federal budget will be consumed in pension by 2050.

Already, the federal government in Pakistan has the highest gross pension replacement rate for public sector employees across South Asia. Pensioners in Pakistan are entitled to receive 70pc of their last drawn salary. However, once medical and other allowances are priced in, the replacement rate in the public sector is the highest for Pakistan as compared to other South Asian countries. Also, the increments from successive governments increase the federal pension from 70pc of last drawn salary to around 140pc in some cases.