Could Lowering Retirement Age Really Slash Your Pension Costs?
There’s a buzz in the air as the government contemplates a bold move: slashing the retirement age by five years. But hold on—experts are raising red flags, suggesting this may not be the golden ticket everyone hopes for.
Right now, the federal pension bill is a staggering Rs1 trillion, with a hefty chunk—Rs260 billion—allocated for civil servants and a jaw-dropping Rs750 billion earmarked for the armed forces. The numbers are alarming, especially since this bill is ballooning faster than the government’s revenue can keep up, signaling an urgent need for comprehensive reforms.
In fact, the government is pouring more money into pensions than it spends on running its own bureaucracy. Something’s got to give!
Governments past and present have attempted to trim the pension bill, with the latest proposal being to reduce the retirement age from 60 to 55. An international lending agency even suggested this change as part of broader pension reforms.
The government is mulling a five-year reduction in the superannuation age, but experts warn that this approach might lack long-term viability.
Proponents claim this move could save Rs50 billion annually if applied uniformly. However, this is just one side of the coin. Last year, the government even considered an increase in the retirement age to 62 to better manage the annual pension budget.
Is This a Smart Move?
Lowering the retirement age runs counter to a global trend where countries are raising the age of superannuation in response to increased life expectancy. Experts are quick to dismiss the proposal, arguing that it could do more harm than good by escalating upfront costs when employees retire.
Experts like Hasaan Khawar, who specializes in development, argue that this strategy simply “doesn’t make sense.” The only slight saving might come from a lower final salary used for pension calculations, if someone retires at 55. But the long-term advantages? Barely a blip on the radar.
Lowering the retirement age means the government would have to cough up pensions for an additional five years—and let’s not forget the substantial upfront payouts due to commutation, which could push civilian pension costs to over a trillion rupees in just five years!
Dr. Ishrat Hussain, a former State Bank governor, echoes these sentiments, stating that the costs of a lower retirement age far outweigh any potential benefits.
Having led the pension reforms commission, Dr. Hussain points out that while the military faces rising pension costs with an average retirement age of 45, lowering the civil service retirement age would lead to similar outcomes.
Maintaining the current retirement age of 60 may be the less risky choice. According to Dr. Hussain, calculating pension liabilities based on final basic salaries—without allowances—could significantly lower the pension bill. Current regulations allow employees to draw pensions that can be double their last salary. He advocates for manageable reforms rather than drastic age reductions.
The Call for Comprehensive Reforms
A recent paper titled “Deferred Dreams: Navigating Pakistan’s Public Sector Pension Crisis” reveals that the federal government’s pension expenses have skyrocketed from Rs245 billion in 2019 to over Rs1 trillion for 2024-25, averaging a staggering 19% increase every year. It’s a trajectory that simply can’t continue.
The burden is projected to double every four years, creating a ticking time bomb for financial sustainability. A 2021 actuarial study estimated a staggering Rs2.9 trillion in obligations for civil servant pensions alone.
Pension liabilities are largely unfunded, and the recent decade has seen the federal pension expenditures increase more than five times while tax revenues grew only 2.7 times. The gap is widening, with pension costs now consuming 12% of the federal government’s net revenue receipts.
The fiscal year 2021-22 marked a turning point, with pension costs surpassing civil government operational expenses for the first time—a trend projected to continue.
Similar challenges loom over provincial governments and state-owned enterprises. This year, the total pension expense for the four provinces is expected to exceed Rs850 billion, with organizations like Pakistan Railways allocating more funds for pensions than salaries for current employees.
Moreover, pension payments now consume about a third of Pakistan Post’s budget, showcasing the systemic issues permeating throughout the government.
Supporters of a lower retirement age argue that it could lead to savings and open up job opportunities for younger individuals in a country grappling with a large youth population and high unemployment rates.
The government is reportedly considering a phased approach to lowering the retirement age across various departments to manage initial costs. Public sector corporations and regulatory bodies would be expected to follow suit, aiming for a smoother transition without relying heavily on federal funds.
In recent years, the federal government has introduced several pension reforms, including a contributory pension fund scheme for new civil employees and military recruits. This scheme mandates that federal employees contribute 10% of their basic pay, while the government contributes 20%.
Overall, the push for reforms is not just about changing retirement ages; it’s about reassessing the entire pension framework and ensuring its sustainability for future generations.
Published in December 2024
Header image edited using Canva Image Upscaler. It illustrates pensioners from Pakistan Railways, standing in a queue to cash their pensions outside Railway Workshop, Mughalpura in October 2011. — Online/File
