According to the latest estimates, expenditure on account of government employee pensions for FY-2025 are going to be Rs 1014 billion or almost 6 percent of the budget outlay for FY 2026. It shows an increase of Rs193 billion or almost 20 percent over the previous year.
As compared to FY-2022 pension expenditures have almost doubled in four years, averaging around 25 percent per annum. Spiraling trend of pension expenditures at this abnormally high rate presents a very worrying state of affairs of our already resource strained economy.
In line with prevailing trends, expenditures on account of pensions are estimated to reach 56 percent of the current expenditures by 2050. As an unfunded liability of the government it presents itself as a ticking time bomb that warrants emergency disposal.
As proposed already, levy of 2.5-5% tax on pensions is estimated to yield Rs 20-40 billion additional revenue. But it would be of little help especially when the cost associated with its administration is also taken into account. Therefore, conventional wisdom of the entire pension scheme needs to be challenged.
Pension scheme is a colonial legacy that was designed to win loyalty of the low paid government employees. It is founded on the premise that upon retirement Government employees would have no alternate source of earning to meet their living expenses. It was then justified because of meager salaries and limited opportunities for supplementary or alternate sources of income in a public sector dominated colonial economy. Idea of pensions is no longer relevant to the demands of modern era as times have changed.
Presently, abundant opportunities exist for experienced employees from which they can benefit after they retire. Moreover, they are not only able to accumulate multitude of assets by virtue of their influence, perks and privileges but are also able to line up alternate sources of income while in service with the exception of low grade employees. It would be evident from their tax records, if declared fully. Also most of the retirees get reemployed in government or private sector organizations directly or indirectly on a retainer-ship basis for lobbying for regulations that are designed to serve interests of multinationals, earning millions annually.
While post-retirement earnings of retirees far exceed previous job earnings, the pension that they get can hardly be justified. No wonder considerable number of wealthy retirees has migrated abroad, particularly to the UAE, Canada, the USA and Australia to find safe haven for their accumulated wealth as well as to escape tax net.
Under the circumstances government expenditure on account of pensions not only causes an undue burden on the exchequer but also deprives unemployed youth of the job opportunities that retired Government employees occupy in the private and public sector.
In this case pension benefits can hardly be justified, unless proven otherwise from retirees tax records (past 5 year average) that they have no alternative source of income. Under the circumstances explained, pension benefits rules warrant a thorough review and rationalization as part of emergency austerity measure. In the meantime it is proposed that:
1) Pension income of those retirees drawing annual aggregate non-pension income amounting to Rs.3 million per annum may be clubbed with their aggregate income for determination of their tax liability.
2) Entitlement of pension may be withdrawn 100% for those found reemployed after retirement.
3) Retirees having no alternate source of income may be allowed pension with a reduction of 10% for Grade 14-16, 20% for Grades 17-19 and 25% for Grades 20-22.
4) Contributory pension scheme may be introduced to shed burden on exchequer through investment of funds in high-yield REITs.
This measure alone is estimated to yield a saving of Rs 700-800 billion, annually. Savings may be utilized to fill partly the budgetary gap. A provision should also be made for investeme in the education sector reforms as well as for the welfare of youth, being the most neglected segment of society (IT/ AI skill development, entrepreneurship, startups, etc.) to effectively address the issue of 66% youth bulge.
Copyright Business Recorder, 2025
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