The politics of pension reform

Last week, Prime Minister Imran Khan expressed his resolve to address the pension issue. It is the first time the issue of pension has found a space on the national policy radar and caught the sitting PM’s attention.

To address the pension problem, the PM must sort out its economics, politics and process. I have written extensively on the economics and process, but not as much on politics. Nonetheless, politics remains the thorniest part. Considering that any reform could potentially change the pension benefits for or impose contribution requirements on government employees, these could be controversial.

The only way to sail through these issues is through winning allies — including the politicians, public sector employees and even the military — by effectively communicating to them that it’s a win-win proposition.

Why is it a win for the politicians? Federal pension payments have been growing at 18% a year, while provincial pension liabilities have been growing even faster. Such abnormal growth is taking a toll on the development budget — the voters’ share. All other budget heads, whether salaries, defence, debt or markup payments, are quite inflexible. It’s the development budget that is likely to get squashed as pension payments balloon further. The annual pension payments by federal and provincial governments and state-owned enterprises are now touching a trillion rupees a year. If somehow, all these pensions could be transitioned to a contributory scheme, it could very well save the government at least Rs500 billion a year, assuming 50% contribution by employees. This money can then be made available for development that can get politicians some votes.

Why is it a win for government employees, especially if they are slapped with a mandatory contribution? The real purpose of pension is to provide a safe and certain post-retirement income stream. And what could be safer than a well-structured transparently managed pension fund? On the contrary, if the government continues with its existing unfunded pension model, it is soon expected to hit a wall. Many public sector employees today will be pensioners of tomorrow, when the government will be forced to make unilateral cuts. Those cuts are going to be much more bitter than the modest contributions that have to be made today. And to sweeten the deal, the government could introduce a one-time increment to make the contributions more palatable.

Most importantly, why is it a win for the military? Many critics have tried to pitch the pension issue as a civil-military imbalance problem, on the pretext that military pensions claim bulk of the pension payments. That is not true. At present, annual military pension payments stand at Rs359 billion, whereas those for civil employees amount to Rs111 billion for federal government, Rs518 billion for provincial governments and a non-estimated amount running into billions for SOEs. This puts military pensions at 36% or less of the annual pension liabilities.

But what is in fact true is that even that is too significant to ignore. Moreover, considering that most armed forces personnel retire at an early age, a sustainable pension model is central to the foundation of the military’s organisational model. Merely reporting military pensions outside the core defence budget cannot keep these going forever and will not ease the criticism either. Furthermore, any sustainability threat in the future is likely to be blind to civil versus military pensioners. A contributory scheme for military personnel, on the other hand, can fix these reputational and sustainability problems very well, and free up this money for combat expenditure.

On pension reforms, the PM’s heart is at the right place, but he should start from sorting out the politics. The economics and process will then be much easier to manage.

Published in The Express Tribune, August 25^th, 2020.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.