How Pakistan’s pension bill swallows development space

Pakistan’s federal budget contains many large numbers, but few explain the state’s shrinking room for manoeuvre as neatly as its pension bill.

In the current financial year, the federal government set aside about Rs1.06 trillion for pensions. That is more than the Rs1 trillion federal development programme and far above the Rs716 billion allocated to the Benazir Income Support Programme. Islamabad is spending more on people who have left government service than on the roads, water systems, hospitals and other projects through which it hopes to expand the economy.

This is not because pensioners have suddenly become unusually expensive. It is the result of a promise made over decades without building the pool of assets needed to pay for it.

Under Pakistan’s traditional system, most public servants receive a defined benefit after retirement. The benefit is linked to salary and length of service, while the government bears the risk and guarantees payment. Employees generally did not contribute to a dedicated retirement account during their careers. Once they retired, their pensions were paid from that year’s budget.

This is an unfunded, pay-as-you-go system. Current taxpayers pay current pensioners, and another batch of employees is added when the next budget arrives.

A defined-benefit pension is attractive to an employee because the retirement income is predictable. For the government, however, it creates an open-ended liability. Salaries rise, pension increases are granted, people live longer and more employees retire. Unless revenues and a pension asset pool grow at a similar pace, the gap lands directly on the exchequer.

That gap has widened quickly. The federal pension allocation was about Rs480 billion in 2020-21. By 2024-25 it had reached Rs1.014 trillion, and the current year’s allocation is around Rs1.06 trillion. Pensions now consume roughly 6.4 per cent of federal current expenditure.

The composition matters too. Of the Rs1.055 trillion shown in the current budget documents, Rs742 billion was allocated for military pensions and Rs243 billion for civilian pensions, with the remainder covering pension increases and the federal pension fund. Roughly seven of every ten rupees in the main pension allocation therefore go towards retired armed forces personnel.

And this is only the federal bill. Provincial governments, autonomous bodies, public universities and state-owned enterprises carry pension obligations of their own. Research by the Pakistan Institute of Development Economics has repeatedly warned that the wider system is fragmented and lacks a matching asset base.

The problem is not merely that the figure is large. Pensions sit inside current expenditure, alongside interest payments, defence, salaries, subsidies and the cost of running government. These expenses are difficult to compress quickly. When revenues disappoint, development spending is easier to postpone than a monthly pension payment.

How did the bill become so unwieldy?