Pensions and other social protections are a difficult topic for policymakers in nearly every society. The problem of building sustainable pension and social protection solutions is, however, much more acute in developing countries, where the fiscal architecture is either too rudimentary or too lopsided to deploy a comprehensive system. Yet given the importance that the current government has laid on this topic, it is worth discussing some aspects of pension systems that need to be addressed systematically. These include an understanding of: (1) looking at the wider (non)structures of informal economic life, (2) measuring the accrued actuarial burden, (3) changing to a defined contribution system, (4) noting the negative role of the IMF and other lenders, (5) digitisation, and (6) attending to the politicisation of pensions (civil & military).

The first point is to recognise the challenge in developing countries regarding the wider absence of structures in economic life that characterise the informality of developing countries. Although estimates vary, the percentage of the non-agricultural economy that is informal may exceed 70% in Pakistan. Because of this, there is a weak fiscal net, tax revenues are perennially low, and public spending is therefore dependent on foreign borrowing. Ultimately, this impacts the very sovereignty of the country, and holds back the potential of the country to build systems that protect and enrich the people. Until the majority of productive society is brought into the formal fiscal system, it is very hard to think of social protections and pensions seriously.

The second point regards the measurement of the accrued actuarial burden. With every passing generation of superannuated government civil servants, both at the federal and provincial levels, the size of the accrued pension liability continues to grow. But how large is this liability? There is currently no comprehensive actuarial effort to calculate the accrued amount, and this must be undertaken for the public and the government to realise the magnitude of the issue. Other countries carefully study the unfunded actuarial liability, and some even incorporate it into their debt-to-GDP ratio.

Thus far, only the Punjab government has undertaken such an actuarial study, finding in 2015 that its unfunded accrued pension liability lay at Rs3.8 trillion, which is 34 times the pension expenditure of the province (Rs112 billion). Applying such a proportion to the national pension expense might suggest an unfunded liability of tens of trillions of rupees. But back-of-the-envelope approaches are no substitute for actuarial rigor. Pension costs are rising at both the federal and provincial level. In Punjab, the compound annual growth rate (CAGR) for the pension expense was a massive 24% for the period 2011-19, meaning that the expense grew from 9.8% of the province’s current expenditure in 2011 to 16.7% in 2019.

A third point concerns the nature of defined benefit (DB) versus defined contribution (DC) plans. DC plans take a regular cut of an employee’s salary and put it into an investment plan, then either funding current retirees through the contributions (pay-as-you-go) or releasing it to the contributing employee upon their retirement (fully-funded). By contrast, DBs are not built on employee contributions, and are the traditional mechanism in Pakistan. Historically, governments around the world instated DB plans, and this was a significant allure for people joining civil services. However, nearly all governments have found this untenable as their populations aged and the accrued liabilities have ballooned. DC plans have therefore gained prominence, and although Pakistan would be one of the last major countries to make a switch from DB to DC, the federal government is reported to be finally considering a contributory pension scheme. Without this, the pension expenses might soon be more than the salary bill of the civilian employees. At the provincial level, things are thought to be even worse, due to factors such as early voluntary retirement of employees, leading to shorter service and longer pension receipt periods.

The fourth point is to understand the negative role of the IMF and other lenders. The IMF is an obliterator of social protections in the developing world, not just in Pakistan. It sees social protections and pensions as an easy way to slash budgets so that its usurious interest payments can be fed through. It has been particularly devastating in Latin America, where countries early on sought to build welfare states to support greater social equality and broad-based economic growth. In Pakistan, the IMF sees that the Finance Ministry calculates pensions to be 6% of current expenditures (FY20/21), and vies for a quick fix by perhaps gutting this category outright. Although pension reform in Pakistan is indeed necessary, the track record of the IMF must be kept in the Third World.

The fifth point is to consider how digitisation offers unique approaches to overseeing the actual practice of pension contribution, investments and execution.  Many countries such as the Netherlands and Australia have built strong fully-funded superannuation systems based on technology, and the pool of investment wealth created for the people is enormous. In Pakistan, “ghost pensioners” are one problem that can be solved through digital oversight, while robust accounting and savvy investing in our high yield fixed income and low multiple equities would be a boon for capital markets, making them deeper and more inclusive for the wider population. Digitisation can in fact solve multiple problems of efficiency, coverage, and oversight.

A sixth point is to note the political undertones of civil and military pensions in South Asian countries.  Pensions are to account for 6% of the federal expenditures in fiscal year 20/21, with a ratio of military to civil ratio of more than 3:1 in the category. This does not go into the defence expenditures as a separate line item. However, the pension outlays of the provinces, which are very large and quickly growing, are entirely for civilian cadres. Therefore, in looking at the combined federal and provincial current expenditure for pensions in the 2020/21 budget, the ratio of military to civilian pensions in Pakistan is closer to 2:3. It is important to keep in mind that, as the largest slice of the Pakistani economic pie is being swallowed up by debt servicing, other line items such as defence and pensions become increasingly political subjects. Vested interests vie intensely for a piece of the stagnant pie.  The fact that Pakistan even faces a pension problem at this juncture is baffling given that its proportion of old people is so small, and its young cohort is so large in both absolute and relative terms. With more than half the national population being below the age of 35, the existence of a pension “bomb” is an indictment of how poorly our society is squandering its potential. Moving beyond this pension “bomb” will require attention towards the aforementioned factors including a broader fiscal net, digitisation, a recognition of the political nature of pension policy, a commitment to pension reform and social protections despite IMF pressure, an actuarial assessment of the challenge, and a shift towards a defined contribution (DC) system.

–The writer is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). He can be reached at cass.thinkers@gmail.com