Pension reforms

Throwing Molotov cocktails (petrol bombs) at the police and in return tear-gassed and water-cannoned with, as is the norm all over the world, protesters are claiming much larger numbers than the official police estimates. This is not a reference to recent events in Pakistan but France where strikes began on 19 January 2023 after the government proposed pension reforms and are continuing to this day.

The reforms envisage raising the retirement age from 62 to 64 to be phased to 63 by end 2027 and to 64 by 2030 (a raise that would undoubtedly be overwhelmingly welcomed in Pakistan) and the increase in minimum contribution period from 41.5 years to 43 years.

The reason for the protests: work-related burnout in France is on the rise. According to one survey, 480,000 French workers experienced “psychological distress” in 2022 – distress associated with getting up early, commuting and office politics.

Another consultancy, Technologia, found in January that up to 3.2 million workers face a burnout risk – over 12 percent of France’s labour force today.

Throw in the decision of the French President to invoke Subsection 3 (Article 49.3) of the French Constitution that allows the government to force the passage of a bill without a vote and one has all the makings of more general public anger against what can be seen as an essentially undemocratic move to legislate without putting it to a vote in parliament.

The French government’s rationale for reforms is sourced to the fact that at present it amounts to nearly 14 percent of the country’s economic output, one of the highest in Europe, with workers and employers across the board (engaged in the public and private sector) assessed to contribute to the pension fund.

However, while in 2000 there were 2.1 workers paying into the system for every one retiree, in 2020 the ratio declined to 1.7 workers for every retiree and is projected to further deteriorate to 1.2 workers per retiree by 2070. Clearly, the system is not economically viable in the long term and needs remedial measures.

Fitch rating agency in its recent report maintained that: “we think the reform could be moderately positive for economic growth and the fiscal balance in the medium-to-long term. It will have a slightly net negative fiscal impact this year (reflecting higher minimum pensions and inflation indexation) before savings gradually take effect. The government estimates that the reform could improve the general government balance by EUR 9 billion in 2027 (0.3% of GDP) and EUR15 billion in 2030 (0.6% of GDP). It aims to achieve a balanced pension budget by 2030.”

The timing and the reason for pension reforms are both compelling. The timing could well be attributed to the fact that President Macron will not face the electorate in the next elections as France’s amended constitutional law of 2008 bars a president from serving more than two consecutive terms.

As a lame-duck president Macron may have thought the time propitious to usher unpopular reforms that he genuinely believes are critical – reforms that were abandoned in 2019 though the onset of the pandemic contributed majorly to that decision.

In contrast, Pakistan’s public sector pension system is funded entirely by the taxpayers and, more particularly, is a rising component of the budget exercise. There is no contribution from the employees throughout their working life or indeed from the government throughout the year. It is increasingly becoming unsustainable as the amount required under this head is rising with each passing year.

In the current fiscal year, pensions are budgeted at 550 billion rupees (395 billion rupees for military pensions and 135 billion rupees for civilian pensions). And private sector pension liabilities have grown from 6.5 percent of operating profits in 2014 to 9.4 percent by 2020, making them financially unsustainable.

Three observations are in order. First, the existing pension system is burdensome for the relatively poorer sections of society as the bulk of government annual revenue continues to be from indirect taxes whose incidence on the poor is greater than on the rich (including sales tax, excise duty, customs duty as well as the petroleum levy which is itemised as outside the domain of the Federal Board of Revenue and therefore does not form part of the divisible pool).

In the current year’s budget, total indirect tax collections are estimated at 4.431 trillion rupees – 63 percent of the total FBR budgeted collections. However, 71 to 72 percent of all direct taxes are withholding taxes in the sales tax mode, deliberately mis-defined as noted in the Auditor General of Pakistan’s last report, and, therefore, out of the budgeted 2.573 trillion rupees of direct tax collections this year, 1.8 trillion rupees are in the indirect tax mode.

Second, these pensions are over and above other perks and privileges extended to senior members of the civilian/judiciary and military establishment, including grant of land priced at a ridiculous low rate, as well as access to lucrative jobs either through re-induction as high paid consultants and/or advisors to the prime minister or to other ministries as well as in commercial enterprises set up by public sector institutions.

There needs to be an adjustment of sorts to ensure that these perks and privileges are phased out, which will not only generate job opportunities for those who have yet to reach the age of superannuation, but will also lead to promotions.

And finally, as per Farooq Tirmizi, the Industrial and Commercial Establishments Ordinance 1968 gratuity was defined as a default benefit (by 1994 increased to the employee’s full month salary multiplied by the number of years of service in that company – with rising costs associated with the increase in salary over the years as well as the number of years of service) that was legally substitutable by provident fund (suitable for big companies only as it is defined as setting up a separate trust in which both employers and employees contribute equally each month and is to be administered and invested separately from the company’s finances which must comply with regulatory measures determined by the Securities and Exchange Commission and the Federal Board of Revenue).

The third option notably a voluntary payment scheme (VPS) in which less than one percent of the country’s corporate retirement assets (contributions by both employers and employees) are invested is a mutual fund account that is owned and managed not by the employers but by the employees though this assumes that the employees would have better capability to select the most profitable investment.

To conclude, focusing on ghost pensioners (a common enough malaise in Pakistan with respect to ghost schools, ghost employees etc.) instead of changing applicable pension rules is a tricky and politically unpopular decision and in Pakistan no chief executive – civilian or military – has had the gumption to change laws which are deepening our economic crisis.

There is no evidence that substantiates the government’s narrative that it is taking sound economic decisions and paying a political cost and this sadly is also evident in the case of pensions.

Copyright Business Recorder, 2023