When you think of the word "benefits," the idea of receiving a fixed amount of money regularly after retirement often comes to mind. This is why government jobs in Pakistan are generally favored, as they offer a secure pension after retirement.
Recently, the Government of Pakistan introduced a new pension scheme aimed at reducing the growing financial burden that pensions place on the national budget. This development has sparked a lot of questions and concerns among current and future retirees.
The newly introduced pension scheme is called the 'Contributory Pension Fund Plan.' It officially came into effect at the beginning of the current fiscal year, on July 1, 2024.
This new pension plan will apply to federal civilian employees who were hired in the ongoing fiscal year, while employees of the armed forces will be included starting from the next fiscal year.
Before delving into the details of the scheme, it's important to understand who qualifies as a pensioner. In Pakistan, government employees, both civilian and military, receive pensions from the government after retirement, which they continue to receive for life. In the event of their death, their widow is entitled to the pension.
Under the current rules, if a government employee passes away and their widow also dies, an unmarried daughter can continue receiving the pension until she marries. However, significant changes have been introduced in the new pension scheme, which differs considerably from the old one.
This new pension scheme was launched at a time when Pakistan's pension budget has exceeded one trillion rupees.
It's worth noting that the amount paid to retired federal employees each month is seen as a major financial burden on the country's resources. Some economists even refer to it as a 'pension bomb' for the government. Pensions account for the fourth-largest expenditure in Pakistan's annual federal budget.
Economists warn that with the country's increasing debt, rising interest payments, and growing defense spending, it is becoming more challenging for the government to sustain pension payments.
How much debt does the government of Pakistan owe and why is it struggling to manage this financial burden?
Adeel Malik, an economics professor at Oxford University in the UK, told BBC Urdu that for a pension system to be successful in any country, it must be financially sustainable and stable.
He explained that Pakistan’s current pension laws are ineffective because the country’s economic condition cannot support the growing pension burden. Therefore, it is crucial to reform the pension structure to align with the nation's economic realities.
It is worth noting that over 1,000 billion rupees have been allocated for pension payments in the current fiscal year.
In Pakistan's budget for the current fiscal year, pension payments rank as the fourth-largest expenditure, following debt repayments, defense spending, and the annual development program.
The government’s pension bill saw a significant rise this year, as 832 billion rupees were paid out to retired employees in the previous fiscal year. According to the current fiscal year’s budget report, the government is expected to bear an additional 122 billion rupees in pension costs this year.
Additionally, Pakistan faces the challenge of paying 9,700 billion rupees in interest on loans, spending 2,200 billion rupees on defense, and allocating 1,400 billion rupees for the annual development program. Meanwhile, the budget set aside for pensions is 1,014 billion rupees, and 839 billion rupees have been allocated for running the entire civil government throughout the fiscal year.
What are the key changes in the government's revised tax policy?
The Ministry of Finance of Pakistan recently issued a notification regarding the new pension policy, known as the 'Contributory Pension Fund Plan.'
According to this policy, the plan has been effective from July 1, 2024, and applies to individuals hired after this date in federal government institutions in Pakistan.
It has been clarified that this plan will initially apply to employees in civilian government institutions starting from July 1, 2024. However, for employees joining the country's armed forces, the plan will take effect in the next fiscal year, beginning July 1, 2025.
Under this new scheme, employees will contribute 10% of their basic salary to the pension fund, while the federal government will contribute 20%.
The federal government has allocated 10 billion rupees for this pension fund in the current fiscal year.
How will the public benefit from the government's new policy?
Shahid Mehmood, an economist at the Pakistan Institute of Development Economics, explained to BBC Urdu that the new pension scheme is a 'contributory pension plan,' meaning both the government and employees will contribute to it.
He highlighted that under the current system, the entire financial burden of pensions falls on the government. However, with the new scheme, employees will also be required to contribute during their employment, and both their contributions and the government's will be pooled into a pension fund.
The money accumulated in this pension fund will be invested to generate returns. Mehmood noted that these investments could be made in areas like the stock market, insurance, government securities, and other sectors, helping to reduce the growing pension burden on the government.
Financial affairs journalist Shehbaz Rana also shared insights with BBC Urdu, stating that the new scheme will apply to employees hired during the current year, while existing and past employees will be exempt from it.
He pointed out that "in the short term, there won't be any immediate benefits for the government, nor will it have a significant impact on the budget. However, in the long term, the new scheme will help reduce pension expenditures."
What is the total allocation for defense spending in the national budget?
In Pakistan's federal budget for the current fiscal year, pension expenditures total 1,014 billion rupees. This amount covers pensions for retired employees from both the civilian government and the military.
The defense budget for the current year has been set at 2,200 billion rupees, with 662 billion rupees allocated specifically for military pensions.
In contrast, 220 billion rupees have been allocated for pensions of retired civilian government employees.
The significant increase in the pension bill this year is largely due to a rise in pensions for retired military personnel. In the previous fiscal year, 583 billion rupees were spent on military pensions, but this has increased by 79 billion rupees to 662 billion rupees for the current year.
On the other hand, the pension allocation for civilian employees has decreased slightly, from 228 billion rupees in the last fiscal year to 220 billion rupees this year, reflecting a reduction of 8 billion rupees.
Financial affairs journalist Shehbaz Rana noted that this new pension scheme won’t provide immediate financial benefits, but the military has agreed to implement it starting in the next fiscal year for newly recruited personnel.
Rana added, "Once this scheme is applied to the military as well, it will bring long-term benefits, as currently, 70% of the pension budget is spent on retired military personnel, while only 30% goes toward government employees' pensions."
Government employees working in civilian and military organizations in Pakistan receive a pension upon retirement. However, there are also government-operated institutions known as autonomous bodies.
Shahid Mehmood explained that employees of these autonomous organizations do not receive pensions funded by the federal government’s budget after they retire.
A list of these organizations is available on the website of Pakistan’s Cabinet Division.
These bodies include the National Highway Authority, Agricultural Development Bank, NADRA, Karachi Port Trust, various railway institutions, the Pakistan Telecommunication Authority, OGRA, and many others, whose employees' pensions are not covered by the federal budget.
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