Rising pensions

ARTICLE: Prime Minister Imran Khan has recently made a statement that 'the pension burden is becoming unsustainable'. The fact is that for the first time the total payment of pensions combined by the federal government, the military, provincial governments and state-owned enterprises exceeded Rs 1 trillion in 2019-20.

The estimated amount paid as pensions is Rs 1057 billion in 2019-20. Payments at the federal level, both civil and military, add up to Rs 447 billion, equivalent to 43 percent of the total. The share of military pensions is over 76 percent. Pensions at the provincial level aggregate to over Rs 500 billion. The largest payment is by the government of Punjab of over Rs 237 billion. Sindh government has incurred expenditure on pensions of Rs 145 billion, followed by the governments of Khyber-Pakhtunkhwa and Balochistan with pension costs of Rs 84 billion and Rs 34 billion respectively.

There has been a big increase also in pension payments by the state-owned enterprises. For example, the burden of pensions on the Railway has risen to almost Rs 40 billion. The aggregate for all the SOEs has approached Rs 110 billion. This has effectively become contingent liabilities for the federal government and has to be increasingly reflected in the subsidies given to these entities.

The question is what is the share of budgetary resources pre-empted by pensions? In the case of the military, pensions pre-empt as much as 23 percent of the defense budget including pensions. Inclusion of salaries and allowances of military personnel increases the share to 55 percent. In effect, only 45 percent of the defense budget is left for operating costs. This is beginning to impact on defense preparedness and implies that there is a strong case for increase in the defense budget, which has grown only modestly in the last two years.

The cost of pensions is relatively low in relation to the federal budget, net of debt servicing and defense expenditure. It was 4 percent in 2019-20. For the provincial governments, the largest claim of pensions on the budget is in Punjab of almost 20 percent in 2019-20. The next is Sindh with the share of pensions of 16 percent, followed by Balochistan and Khyber-Pakhtunkhwa of below 15 percent.

The issue is whether pensions are pre-empting a larger share of budgetary resources over the years? The answer is an unambiguous yes. At the federal level, between 2007-08 and 2019-20, military pensions have increased seven-fold while the defense budget is five times larger. Similarly, civil pensions are up six-fold while available resources are only three times larger.

The estimated number of pensioners is 1.8 million at the federal level, of which 80 percent are retired soldiers and military officers. At the provincial level, the estimated number is almost 2 million. Therefore, the total number of retired government personnel is almost 4 million. If the retired employees of SOEs are included, the number approaches 4.5 million. This is by far the largest social protection program in the country today. Also, FBR estimates are that pensions in the public sector significantly exceed pension payments in the private sector.

What is the level of pension per retired person? It is approximately Rs 20,000 per month for a retired military person. The corresponding magnitude for retired government servant is somewhat higher at close to Rs 30,000 per month. Given the basic pay scales from BPS-1 to BPS-22 and the fact that the pension is 70 percent of the last basic pay earned, the pension of a person retiring in BPS-1 is close to Rs 9450 per month on average excluding some allowances, while it is over nine times higher for a retiring BPS-22 official at Rs 86,500 per month. As such there is a case for varying the rate of pension on basic pay from 80 percent in BPS-1 to 60 percent in BPS-22. Clearly, employees retiring from low BPS cadres are not yet receiving enough to cater for their basic needs. Also, future pension awards should grant a higher increase for those pensioners on lower grades and to those who retired more than ten years ago.

The government of Punjab has undertaken a detailed exercise of the trend in pension payments. From 2009-10 to 2018-19, the cumulative increase annually in the rate of pensions is 187 percent. In comparison, the cumulative rise in the Consumer Price Index is 72 percent. Therefore, there has been a more than doubling of the real pension to a typical pensioner during this period.

The Government of Punjab has also been operating a Pension Fund to at least partially meet its annual pension liability. Accretions to the fund are based on annual contributions from budgetary resources. From 2016-17 to 2018-19, the annual contribution has been only a modest Rs 5 billion.

The Ministry of Finance in its statement to the Prime Minister has asserted that the pension bill has become unsustainable because pensions are non-contributory in nature and non-funded. Further, numerous allowances are also included in the pensions. The MOF has, therefore, proposed the development of a Pension Fund at the Federal level. Consequently, the Prime Minister has directed the Ministry to include eminent international experts in the Pay and Pensions Committee to formulate proposals. Pakistan also has a Society of Actuaries and there is capacity within the country to assist the Committee.

Pakistan has been facing an exponential increase in its various liabilities. The first problem of the debt servicing burden has been visible for some time now. It has risen by 75 percent in the last two years and now claims 42 percent of available budgetary resources of tax and non-tax revenues. Similarly, there is now the time bomb of rising pensions. The outlay on pensions by the Federal and Provincial Governments has gone up by 43 percent since 2017-18 and now pre-empts 15 percent of available revenues. A progressively lower share of public funds of only 43 percent is left for provision of basic services. This does not auger well for the future prospects of growth in real per capita income and for the rise in the level of human development.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2020