Increasing the Retirement Age and Enhancing Pakistan’s Economic Outlook
A recent recommendation (by the then Senate Chair) to enhance the retirement age of a professor to 65 years, along with a 75% tax rebate, is being appreciated in academic circles. However, it is proposed that this relaxation should not be limited to university professors. The need of the hour is to revisit pension and social security plans altogether in the context of the current economic outlook of Pakistan.
In September, 2013 right after the present government’s election victory, the International Monetary Fund (IMF) approved a 36-month Extended Fund Facility (EFF) for Pakistan to bring price stability, fiscal sustainability and economic growth in the country. In April, 2014 the IMF advised Pakistan to increase the retirement age to reduce its fiscal burden of high pensions and salaries of alternately appointed new staff. The senior bureaucracy recommended an increase in the retirement age to 62 years but the federal and provincial governments discouraged such proposals mainly because of political incentives to provide jobs to a growing younger population.
In 2015, the government successfully met the requirements of EFF consequently. The Executive Board of the IMF on September 28, 2016 completed the twelfth and final review of Pakistan’s three-year economic reform program supported by an EFF arrangement, which enabled the immediate disbursement of the final tranche of $102.1 million out of a total of $6.15 billion to Pakistan. The next day, the government proudly announced that it had formally said goodbye to the IMF. However, in jubilance and celebration, the government neglected the cautions of IMF regarding strict post-program monitoring with respect to twin deficits [proposition that there is a strong causal link between a nation’s government budget balance and its current account balance], financial sector reforms, central bank autonomy, strength of forex reserves to ensure sufficient exchange rate flexibility, monetary control to keep inflation at its possible low level and implementation of new business climate reforms, etc.
By the time the government was celebrating its liberation from IMF, many national newspapers were publishing articles on Pakistan’s soaring debt and twin deficits. Consequently, a debate started between independent financial analysts and the Ministry of Finance, in which the Ministry kept rejecting the claims of analysts regarding the rapidly deteriorating financial health of the country. The situation got nastier with time.
Today, Pakistan’s foreign currency reserves are touching a record low level of $18-19 billion. The government has almost exhausted its ammunition to defend its currency in the international market. Our foreign currency reserves are depleting at a speed of $200-250 million per week, our trade deficit has reached to $21.5 billion, as a result, the dollar has crossed PKR 110. The State Bank of Pakistan in its recent monetary policy note has increased the policy rate with 50 basis points (bps) depicting an increase in the future inflation rate. Moreover, a recent decision of the international Financial Action Task Force (FATF) to put Pakistan on its global ‘grey list’ for terror financing is expected to increase financial problems for Pakistan. Our future support from the World Bank is also based heavily on IMF’s financial appraisal which, to date, has not been expected to be in our favour, endangering our future relations with the World Bank also. The magic of Pakistan Development Fund Limited (PDFL), the brainchild of former Finance Minister, Ishaq Dar, is also less likely to work this time. The dichotomous overtures call either to increase tax revenues or decrease public spending. To achieve the balance between the two, the present government has almost exhausted every possible option, including the devising of 4 tax amnesty schemes, but there is no quick solution to that. The speed with which our foreign currency reserves are depleting, financial analysts are predicting a 2-3 month period before we finally go to the IMF for help. In such an unfortunate situation, we would be required to implement austerity requirements to reduce our fiscal burden.
It should be remembered here that the demand for an increase in the retirement age by IMF is not new. In the past, it has been demanded from other countries as well, like Greece and Ukraine, etc. as a part of IMF’s austerity scheme. Besides the theoretical and social pros and cons of increasing the retirement age, it is important to note that Pakistan’s recent six-month (July-Dec 2017) fiscal deficit is PKR 796 billion in which the cost of superannuation allowances and pensions amounting to PKR 149 billion is included. An increase in the retirement age, along with other austerity measures can help improve the fiscal deficit. Furthermore, commutation values also decline as a person retires at the age of 65 years. An important thing to remember here is that it would not be as straightforward for the government as it looks to increase the retirement age by five years at once. The government shall have to face the pressure of the young population for not offering new appointments in replacement of the retired ones, especially in the election year. However, the objective can be achieved by sequentially enhancing the retirement age on a yearly basis. In this respect, the UK model could be helpful, which has planned to increase the retirement age to 67 years by 2028.
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