Despite ticking pension bomb, govt increases annuity for federal employees by 17.5% 

Probably one of the biggest ticking bombs on the expenditure side of Pakistan’s federal budget is Pensions. While little to no heed is paid to this problem, the bill keeps on ballooning year in year out. Over the last 12 years, Pakistan’s pension budget allocation has gone up by 500% exclusive of provincial pensions. 

In the budget announced for the upcoming financial year, the government has allocated Rs. 761 billion in pensions for federal employees. This includes military and civil pensions and an additional 10 billion for a proposed pension fund. The total pension expenditure that is estimated this year, is a whopping 25% more than the previous year. 

With the newly announced budget, the government has announced a 17.5% flat increment in the pensions of all government officers from grade 1 to 22. The increase has already been accounted for in the current allocation.

It is important to note here that the military pensions in this bill constitute up to 74% of the total pension budget. The military pensions amount up to Rs. 563 billion whereas the civil pensions make up Rs. 188 billion out of the total. 10 billion has been allocated for a pension fund.

Last year, Pakistan allocated Rs. 609 billion in pensions which was supposed to incorporate a 13% increase in pensions. However during the financial year, no increment was put in place due to a tight fiscal schedule. But why does the government want to set up a pension fund?

To answer this question we go back to 2009, when the government, for the first time included future retirees in the receivers of the increment awarded in 2009. In the following years, the same act was repeated more than 6 times. The step compounded increments for retirees, leaving service after 2020 for up to 6 times. This caused the pension figures to balloon to the levels that they are currently at. Even if the government does not make future retirees a party to the current increment, the increments in the past can not be undone. 

Pakistan follows a version of the defined benefits in pensions that demands the disbursement directly through the revenue account. As opposed to this much of the developed world works on either a defined contribution model or a funded defined benefit. The latter is the method that Ishaq Dar is aiming for to avoid a trainwreck in the future. Will the PDM government be able to achieve that is a tough question, especially where nobody in Pakistan, including the finance ministry can even think of any sort of primary surplus.

With the current pension bill at 6% of the total revenue and 8% of the tax revenue, the government needs an investment much more sizable than 10 billion to make any dent in the pensions bill.

On top of that, despite tall claims of providing relief to the poor and rounding up the rich, the government has failed to do so with its own employees. With a flat 17.5% increment, the pension for 17-22 grade officers would increase at a much higher rate. Not to mention the compounded effect of these increments takes the pensions of some of the retired officers to an obscenely high level.

By factoring out the 17.5% increase in pension no s, the government is estimating for a mere 6% increase in its budget expense, that too at a higher value with an increased pool of retired officers. For context, the yearly average in the past 4 years for this number is close to 15%. Not only does this put the allocation of an additional 10 billion in threat, it also shows that the current estimation for the pension budget has been done with careless optimism.