The Pakistani government is considering reducing the retirement age for government employees from 60 to 55 years old. This proposal aims to save around Rs. 1 trillion per year in pension bills.
The government believes this move could reduce long-term pension liabilities by approximately Rs. 50 billion annually. However, it may also lead to higher upfront costs due to severance packages and early retirements.
Over the past decade, the federal government’s pension costs have increased more than fivefold, from Rs. 164 billion in 2011 to Rs. 988 billion in 2021.
In comparison, tax revenues have only grown 2.7 times during the same period. The proposed reforms also include introducing a contributory pension scheme for future employees. Public sector corporations and regulatory bodies may be asked to implement similar reductions in retirement age and fund severance costs independently.
While the move aligns with practices in neighboring countries like India, Malaysia, and Sri Lanka, where retirement ages range from 55 to 60, there are concerns about the loss of experienced personnel and potential impacts on workforce efficiency.
Reducing pension liabilities in Pakistan
Finance Minister Muhammad Aurangzeb recently presided over a meeting where the Economic Coordination Committee (ECC) of the cabinet expressed concern over delays in implementing its instructions for amending the pension scheme and future roadmap.
The proposal suggests that reducing the retirement age by five years could lower pension payouts, thereby reducing the pension liability expense by an estimated Rs. 50 billion per annum if implemented across the board. To manage the initial increase in expenditure from early severance packages, the government is considering phased implementation.
Currently, the federal pension bill exceeds Rs. 1 trillion, with the civil and armed forces shares being roughly Rs. 260 billion and Rs.
750 billion, respectively. To manage the increasing annual pension bill, the government has recently introduced a contributory pension scheme for all future government employments. A leading multilateral institution suggested that decreasing the retirement age by five years could positively impact the pension budget.
Potential benefits include reduced pension liability, savings on pension payments, and a shorter duration-based calculation for pensions. However, the proposal has potential drawbacks, such as increased upfront costs from severance packages or retirement benefits, loss of experienced human capital, and impacts on social security systems. If approved, the government believes this will help mitigate immediate pension costs in the long run.
