Pension expenditure becoming unsustainable: SBP report

Pension expenditure becoming unsustainable: SBP report

KARACHI: State Bank of Pakistan (SBP) on Tuesday said that public pension expenditure in Pakistan is on the path to becoming unsustainable.

The central bank prepared a study report on rising expenditures of pension which is worrisome.

“ … limited fiscal space is a major reason why increasing pension spending is worrisome, improvements in the pension framework can substantially help make future payments manageable,” the SBP said.

Eliminating the generous retrospective increments and reducing the list of dependents eligible for pension payments appear as quick and easy-to implement measures.

However, the policy recommendations mentioned in the special section are intended to suggest a general direction.

The concerned authorities must carry out specialized evaluation exercises at their own end and implement the required legislative reforms accordingly.

Finally, it is important to undertake periodic review of implemented reforms in order to ensure long-term sustainability of the pension structure.

The SBP said that in Pakistan the absolute level of old-age income support coverage is on the lower side.

“For instance, the pensions to GDP ratio stands at just 2.2 percent, while the proportion of the population participating in programs that provide old-age contributory pensions, health and/or social security insurance is only 5.9 percent – much lower than the developing economies average of 20.3 percent.”

The old age dependency ratio – the number of people aged 65 and above compared to the number of working age people – is 8.5 percent, and is expected to rise only marginally to 11.2 percent by 2040.

But even with such a low pension coverage in the country, reforms to public pensions have become unavoidable in Pakistan in the face of the worrying acceleration in the associated public sector spending witnessed over the last decade.

“This is principally because public pensions are of an unfunded nature and thus are burdening the already tight fiscal revenue situation.”

Specifically, the pension expenditure at the federal level has risen by a CAGR of 18 percent in Pakistan during FY11-21.

Provincial pension expenditure has also witnessed a similar surge.

Within consolidated pension expenditures, civil pensions (including federal and provincial) constituted 63.2 percent, whereas military pensions made up around 36.8 percent on average during the last 5 years.

The overall pension spending as a share of tax revenue has reached 18.7 percent as of FY20, almost double the level a decade earlier.

“If this proportion continues to grow, it could result in the crowding out of other valuable spending avenues: pension spending as percent of total budgeted expenditures for FY20 exceeded health and education spending on both federal and provincial fronts and is almost half the level of consolidated development expenditures.”

In this regard, International Financial Institutions (IFIs), such as the World Bank and the International Monetary Fund (IMF) have also started flagging the rising pension expenditure as a pressing concern for Pakistan’s debt sustainability.

What is even more concerning is the fact that pension expenditure is expected to rise further going forward, given the increase in both retiree headcount and the lifespan of future retirees. If fiscal revenues continue on their existing trajectory, the rising pace of pension-related spending would become worrying from the sustainability point of view.

According to the World Bank’s projections, civil service pension payments would overtake wage expenditures by 2023 and 2028 in Punjab and Sindh, respectively, and come near to their level in the federal government by around 2050.

Within this context, this special section intends to: (i) describe the existing public sector pensions and benefits system in Pakistan; (ii) highlight major factors that are making pension expenditures unsustainable; and (iii) provide a set of policy recommendations to make the growing postretirement expenditures sustainable going forward.

Here, it is important to mention that structural factors, such as the size of the civil government and the military, the unfunded nature of pensions, and disproportionally high share of non-gazetted employees (95.3 percent of total federal government employees), are all important factors governing the overall level of pension expenditures in the country.

However, these factors are beyond the scope of this section; here, we intend to highlight system-bound aspects that explain the steady rise in these expenditures over the last decade.

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