Pakistan’s Pension Reform: A Step Toward Fiscal Sustainability or a Band-Aid Solution?

Desk

Dr Bilawal Kamran

Pakistan’s federal government has initiated pension reforms to address the escalating pension liabilities that have become a significant fiscal challenge. The reforms, effective from January 1, 2025, include measures such as eliminating multiple pensions, revising pension calculation methods, and introducing a contributory pension scheme for new employees. While these steps are commendable, their success hinges on equitable implementation across both civilian and military sectors and the government’s ability to address the underlying issues contributing to the pension burden.

Pension liabilities have emerged as one of Pakistan’s most pressing fiscal concerns. For the fiscal year 2024-25, the government allocated Rs1.014 trillion for pensions, with approximately Rs662 billion earmarked for military retirees and Rs220 billion for civilian retirees. This allocation reflects a significant increase from previous years and underscores the unsustainable trajectory of pension expenditures.

The rapid growth of pension liabilities is attributed to several factors, including early retirements, increased life expectancy, and the unfunded nature of pension schemes. The State Bank of Pakistan has warned that without substantial reforms, the pension bill could continue to rise at an annual rate of 22-25% over the next 35 years.

Key Reforms and Their Implications

The recent pension reforms introduce several significant changes:

Elimination of Multiple Pensions: Retired employees rejoining government service will forfeit their pension, aligning with International Monetary Fund (IMF) conditions to reduce fiscal liabilities .
Revised Pension Calculation: Pensions will now be based on the average salary of the last 24 months of service, replacing the previous method that considered the last drawn salary over 30 years .
Contributory Pension Scheme: A new scheme has been introduced for employees hired from July 1, 2024, to ensure future pension sustainability .

These reforms aim to reduce the government’s pension bill and ensure fairness across both civilian and military sectors. However, their effectiveness will depend on consistent and equitable implementation.

Reports indicate delays in implementing the contributory pension scheme for military personnel, raising concerns about the uniform application of reforms. Such discrepancies could undermine the objectives of the reforms and perpetuate existing inequalities.

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Moreover, the government’s efforts to control pension expenditures must be accompanied by broader civil service reforms. Pakistan’s bureaucracy is often cited as one of the largest and least efficient in the world. Without addressing the size and inefficiency of the civil service, pension reforms may only provide temporary relief and fail to achieve long-term fiscal sustainability.

The IMF has been instrumental in shaping Pakistan’s pension reform agenda. The recent reforms align with conditions set by the IMF and other international creditors, emphasizing the need for fiscal discipline and sustainable public finances . While international pressure has spurred necessary reforms, it also highlights the challenges Pakistan faces in balancing domestic needs with external expectations.

While the pension reforms are a step in the right direction, they represent only a partial solution to Pakistan’s fiscal challenges. A comprehensive approach is needed, encompassing not only pension reforms but also broader civil service reforms and measures to enhance revenue generation. Without addressing the root causes of fiscal deficits, including inefficiencies in public administration and tax collection, the government’s efforts may fall short of achieving sustainable economic stability.

In conclusion, Pakistan’s pension reforms are a necessary but insufficient response to the country’s fiscal challenges. Their success will depend on equitable implementation, comprehensive civil service reforms, and a balanced approach to fiscal management that considers both domestic priorities and international obligations.