In a major financial move, the government has decided to cut pension benefits for retired civil servants and military personnel. This decision is expected to save the country a staggering Rs1.7 trillion over the next 10 years. To put this into perspective, this amount is equivalent to the cost of building a new railway track from Peshawar to Karachi.
The Finance Ministry estimates that, by reducing pension benefits, the government’s pension budget will drop from Rs4.8 trillion to Rs3.1 trillion over the next decade. This reduction is a significant 36% cut, and on average, the pension bill will decrease by Rs170 billion every year.
In the first year, the positive impact of this change is expected to be Rs83 billion, and by fiscal year 2034-35, this figure is projected to rise to an impressive Rs1.7 trillion in savings.
A major factor contributing to this pension bill increase in the past decade has been the growing number of retirees. Additionally, pensioners were able to take a portion of their pension in advance, which further added to the overall pension burden. Retired employees were eligible to take seven and a half years’ worth of pension at the rate of 35% of the total pension amount.
As a result of these factors, the Ministry of Finance has recently issued three notifications to make significant changes in how pensions are managed. The government has decided to discontinue multiple pensions for one person, reduce the first take-home pension amount, and change how future increases in pension will be determined.
Another important change is that the pension will no longer be compounded annually. Instead, any increases will be treated separately from the base pension, which is a practice similar to an ad hoc salary increase. This change will help prevent pension costs from spiraling further.
For the current fiscal year, the pension budget is Rs1.04 trillion, with Rs169 billion allocated specifically for paying pension advances. This year’s pension budget is already 24% higher than the previous year. A decade ago, the pension budget was just Rs204 billion, but it has risen by 404% to over Rs1 trillion this year.
One of the biggest changes for new retirees is how their pensions will be calculated. Instead of being based on the last salary drawn, pensions for new retirees will now be calculated based on the average salary of their last two years of service. Additionally, pensions for individuals receiving more than one pension will no longer be allowed.
The government’s move to reduce pension benefits is part of a larger effort to control public spending. After debt servicing, defense, and development costs, pensions are the fourth largest expenditure in the national budget. Without these changes, the government would have needed an estimated Rs10 trillion in assets to fund pension obligations. After the changes, experts predict that the government will only need Rs7 trillion in assets.
The government has been careful in making these changes, ensuring that they comply with the law and can stand up to scrutiny in the courts. The pension reforms have been designed to address the growing pension burden while still respecting legally protected benefits.
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