Amid ongoing discussions about increasing the retirement age for certain positions, the federal government is now considering reducing the average retirement age by five years, from 60 to 55, as part of broader pension reforms aimed at curbing the rising pension bill. The proposal, reportedly suggested by an international lender, is under review, according to a senior government official as reported by Dawn,
The move comes as the government grapples with an unsustainable pension burden, which has ballooned to over Rs1 trillion annually. Of this, Rs260 billion is allocated to civil pensions, while Rs750 billion is spent on military pensions. The proposed reduction in retirement age could potentially save an estimated Rs50 billion per year in pension liabilities if implemented across the board.
Interestingly, the finance ministry had previously proposed increasing the retirement age to 62 to temporarily delay pension payouts. However, this suggestion was opposed by the establishment division. Currently, pensions for government employees are calculated based on their last drawn basic salary at the age of 60, with a cap of 30 years of service in some cases.
At a recent meeting chaired by Finance Minister Muhammad Aurangzeb, the Economic Coordination Committee (ECC) expressed concern over delays in implementing earlier decisions regarding pension reforms. The ECC had issued instructions on May 27 and June 13 for amendments to the pension scheme and a future roadmap, but these remain unimplemented due to the need for extensive consultations with stakeholders.
Potential Benefits and Drawbacks
Reducing the retirement age could lower the government’s long-term pension liability by shortening the duration of pension payments. However, the proposal is not without challenges. Early retirements would require upfront costs, such as severance packages, which could offset some of the anticipated savings. Additionally, the loss of experienced personnel could impact workforce productivity and efficiency.
The government is considering a phased implementation to manage these challenges and to allow skilled public sector employees to transition to the private sector. Public sector corporations, regulatory authorities, and professional councils may also be asked to adopt the reduced retirement age, with these entities expected to fund severance packages or retirement benefits from their own resources.
International Comparisons and Sustainability Concerns
Officials noted that retirement ages in neighboring countries such as India, Malaysia, Indonesia, Thailand, the Philippines, Sri Lanka, and Brunei range from 55 to 60 years. Pakistan’s current retirement age of 60 is on the higher end of this spectrum.
A recent study by the Pakistan Institute of Development Economics (PIDE) highlighted the alarming growth in pension expenditures. Between 2011 and 2021, federal and military pension spending increased from Rs164 billion to Rs988 billion, a more than fivefold rise. Provincial pension expenditures grew even faster, increasing sevenfold during the same period. In contrast, tax revenues only grew 2.7 times, raising serious concerns about the sustainability of the pension system.
“The federal government’s expenditure on pensions has increased more than five times in the last decade, while provincial pension spending has grown even faster. This poses significant sustainability risks,” the PIDE study warned.
To address the growing pension burden, the government has recently introduced a contributory pension scheme for all future government employees. This scheme aims to shift the financial responsibility for pensions away from the government and onto employees and their contributions.
While the government continues to weigh the legal and financial implications of reducing the retirement age, the proposal remains under consideration as part of a broader effort to reform the pension system and ensure its long-term sustainability.
