In a momentous policy change, the federal government is mulling over slashing the retirement age of government servants by 5 years, from 60 to 55 years, presumably to save around Rs. 1 trillion a year on pension payments. The proposed move is part of wider reforms to tackle the rising pension burden on the national exchequer.
It is expected to save Rs. 50 billion in pensions by the government cutting the payment duration of pensions, and reports suggest that the government is counting on it. On the one hand, this approach could even translate into a short-term increase in the costs of termination packages and early retirement benefits.
Nonetheless, this move is still seen as critical by the policymakers to ease the burgeoning pension liabilities, which surged more than five times in a decade from Rs. 164 billion in 2010 to Rs. 988 billion in 2021. Meanwhile, tax revenues have only increased 2.7 times in this period, a mismatch that worsens fiscal pressures.
The government is also considering the possibility of setting up a contributory pension system for fresh hires apart from reducing the retirement age. This will help ease the burden on state resources as future pensions will be funded through contributions from employees and the government under this model. One point clarified that both public sector corporations and regulators would align their age at retirement and will manage severance costs themselves to avoid discrepancies between the two sectors.
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While this approach reflects practices in neighboring countries like India, Malaysia, and Sri Lanka where retirement ages hover between 55 and 60, opponents have expressed concerns about potential downsides. This includes the loss of seasoned employees, which could impact institutional knowledge and workforce productivity. The government’s challenge will be to strike the right balance between financial savings and retaining the necessary talent.
These proposed reforms, if enacted, will significantly relieve pressure on the federal budget and help ensure the long-term viability of the pension system. Determining the balance between fiscal responsibility and employment readiness, however, will be critical to the success of the program.