Tax to pension spending surges to 18.7pc: SBP

ISLAMABAD: The overall pension spending as a share of tax revenue in the country has reached to 18.7 percent as of Fiscal Year 2020, that is almost double, a decade earlier, while the pension to GDP ratio has also risen to the level of 2.2 percent, , State Bank of Pakistan reported.

The report issued by the Central Bank feared that if this proportion continues to grow, it could result in the crowding out of other valuable spending avenues: pension spending as percent of total budgeted expenditures for FY20 exceeded health and education spending on both federal and provincial fronts and is almost half the level of consolidated development expenditures.

In this regard, International Financial Institutions (IFIs), such as the World Bank and the International Monetary Fund (IMF) have also started flagging the rising pension expenditure as a pressing concern for Pakistan’s debt sustainability.

What is even more concerning is the fact that pension expenditure is expected to rise further going forward, given the increase in both retiree headcount and the lifespan of future retirees.

If fiscal revenues continue on their existing trajectory, the rising pace of pension-related spending would become worrying from the sustainability point of view.

According to the World Bank’s projections, civil service pension payments would overtake wage expenditures by 2023 and 2028 in Punjab and Sindh, respectively, and come near to their level in the federal government by around 2050.

In its report "Public Pension Expenditures in Pakistan – The Need for Reforms", the Central Bank also suggested a number of reforms to contain the increasing expenditures in terms of pensions.

The report added that the proportion of the population participating in programs that provide old-age contributory pensions, health and/or social security insurance is only 5.9 percent – much lower than the developing economies average of 20.3 percent.

Similarly the old age dependency ratio the number of people aged 65 and above compared to the number of working age people – is 8.5 percent, and is expected to rise only marginally to 11.2 percent by 2040.

The report said that reforms to public pensions have become unavoidable in Pakistan because public pensions are of an unfunded nature and thus are burdening the already tight fiscal revenue situation.

Within consolidated pension expenditures, civil pensions (including federal and provincial) constituted 63.2 percent, whereas military pensions made up around 36.8 percent on average during the last 5 years.

The report suggested that ceiling and price indexation measures could help reduce the excessively high replacement rate.

The current pension structure defines the minimum pension limit, which has been revised quite frequently in the last ten years.

However, the system does not enforce any ceilings for maximum pension benefits and thus the gross replacement rate has exceeded the 100 percent level in the country.

To rationalize the replacement rate, the government can reinforce ceilings on pensionable earnings as imposed in many countries including the US, Canada, India, Hong Kong, Japan, Germany, and Italy etc.

Eliminating the generous retrospective increments and reducing the list of dependents eligible for pension payments appear as quick and easy-to implement measures.

The report called the concerned authorities to carry out specialized evaluation exercises at their own end and implement the required legislative reforms accordingly.