A trader counts Pakistani rupee notes at a currency exchange booth in Peshawar, Pakistan December 3, 2018. — Reuters
Pakistan is now spending more on its pension expenditures than its entire federal development programme. Our fiscal reality is no longer confined to public debt, inflation or energy subsidies but an outdated, expanding public pension system. It is becoming our country’s greatest long-term obligation. These structural obligations in the national budget continue to grow with little scrutiny, as public debate remains consumed by taxation, tariffs and IMF programmes.
The opportunity cost is evident in billions of rupees that could fund schools, hospitals and infrastructure, which are instead utilised to meet an unfunded pension system obligation that is rising faster than government revenue. Pension liabilities are not debated as rigorously in the budgetary context as sovereign debt. Both pose similar systemic risk to Pakistan’s fiscal architectural future.
Pensions are not the issue, because a responsible state owes self-respect and security to those who have dedicated their careers to its service and must be offered a dignified retirement arrangement.
The problem lies in the continual adherence to the unfunded Defined Benefit (DB) system, under which government promises a guaranteed pension without setting aside sufficient investment assets during an employee’s working life. It is entirely funded by current taxpayers’ money out of annual budgets. This was a twentieth-century approach when the population were younger, and life expectancy was shorter. Now this approach is unsustainable as retirees live longer, the public workforce expands and fiscal space narrows.
At present, the federal government has 590,000 civil servants and 415,000 federal government pensioners, and it is increasing. Between 2021 and 2026, the federal government has recorded 35,000-40,000 retirements – 6,000-8,000 employees annually. There are a total of four million civil servants in both the federal and provincial governments in Pakistan. Although no consolidated national database is available, federal and provincial governments together recruited 40,000-70,000 new public employees every year – nearly 200,000-350,000 recruits over five years – potentially adding decades of future pension liabilities under the DB model.
By comparison, India has 20 million civil servants with around 500,000 retirements and 700,000 recruitments every year. They reformed their pension system in 2004, introducing the National Pension and the unified pension system. The United Kingdom has 560,000 civil servants, with 10,000 retirements and 45,000 recruitments every year. They have a Career Average Defined Benefits (Alpha) pension scheme that requires employee contributions, thereby supporting long-term fiscal sustainability.
Our Budget 2026-27 allocates Rs1.169 trillion for pensions, an 11 per cent increase from Rs1.055 trillion the previous year. There has been a 46 per cent increase in federal pension expenditure over the last three years, from Rs801 billion to Rs1.169 trillion, making it the fastest-growing component of recurrent government spending. It is 7.0 per cent of total federal expenditure and nearly a tenth of all current expenditure, placing this obligation alongside debt servicing and defence. Moreover, these payments cannot be deferred the way a motorway or a dam can; therefore, they put pressure on the entire federal budget.
Our future is at stake; imagine the opportunity cost, and this must concern every policymaker, regardless of their political affiliation. Budget 2026-27 allocated Rs1.169 trillion to pension expenditures as opposed to Rs1 trillion to the Public Sector Development Programme (PSDP); we are spending more on preserving our yesterday than planning and building our tomorrow.
Reforming pensions is not a unique challenge for Pakistan; we can certainly learn from the Australian Superannuation system, the Canadian Pension Fund, and the Singaporean Central Provident Fund, among others. All these countries gradually moved towards contributory pension models in which both employees and employers make contributions throughout their careers, while professional managers invest those funds.
These reforms relieved the burden on public finances while simultaneously making long-term domestic capital available to finance infrastructure, housing, renewable energy and industrial growth. Pension reform must not be confused with a cost-saving exercise; it is rather a national investment strategy that generates returns for retirees while building the very foundations of economic development.
Pakistan has no pension fund and reforms initiated two years ago are still going through execution phases. The federal government, together with the provinces, has already started contributory pension arrangements for newly recruited employees. Now the focus must be on national integrated payroll systems capable of deducting and matching contributions, independently governed retirement funds, accurate actuarial modelling, robust cybersecurity and transparent regulatory oversight. Without these institutional foundations, it will be very difficult to turn these reforms into reality.
This article is certainly not an argument against retired teachers, judges, soldiers, doctors, or civil servants, but an argument for ensuring the financial sustainability of the promises made to them. This article, however, extends well beyond Defined Benefit (DB) versus Defined Contribution (DC). In Pakistan, we operate one of the most disintegrated public pension frameworks in the world – different institutions, autonomous bodies and statutory authorities etc, all maintaining detached retirement rules and benefit structures. For instance, there are individuals who accumulate multiple taxpayer-funded pensions across successive careers in different public institutions and continue to draw a full government salary after re-employment while simultaneously collecting a pension. This has fuelled a legitimate public debate, as some individuals in Pakistan are drawing more than four pensions.
These overlaps can be addressed through integrated remuneration frameworks or pension offset mechanisms that respect accumulated rights while eradicating unwarranted redundancies and duplication. Many countries have adopted the One Citizen, One Government Pension approach, and Pakistan must transparently incorporate this principle into its statutory framework. Every citizen who serves the state should receive a single, transparently calculated pension based on his/her total qualifying service, rather than multiple interrelating prerogatives. There must be coherence in the system so that citizens who finance the state through their taxes can be assured that it rewards service fairly and consistently.
Every crisis brings an opportunity, and here lies genuine opportunity beyond fiscal necessity. Across the globe, pension funds have evolved into engines of national infrastructure investment, financing highways, ports, renewable energy and technology while also stabilising capital markets. We are financing our pensions entirely through annual taxation and have never established the large domestic institutional investors that anchor mature capital markets elsewhere.
The savings of today’s public servants should finance tomorrow’s future rather than become an annual fiscal burden financed totally through future taxpayers. The answer is simple: perhaps a professionally managed, independently governed contributory pension system could, over time, accumulate assets measured in trillions of rupees, facilitating enduring capital for infrastructure bonds, renewable energy projects, export industries, venture capital and Real Estate Investment Trusts, all without resorting to external debt.
Institutional capital always promotes corporate governance and market stability, and that’s what Pakistan needs in its comparatively shallow capital markets. This pension system must have governance of the highest order – independent boards, fiduciary responsibility, external audits and prudent investment mandates, insulated entirely from political interference.
Our demographic reality demands that we take this initiative urgently, as 60 per cent of Pakistan’s population is under the age of 30. Every year, as these youngsters enter the labour market, it demands more investment in education, healthcare, digital infrastructure and industrial competitiveness. The debate goes beyond budgetary questions and reaches into intergenerational justice. Governments are not remembered for the difficult decisions they postpone, but for the courage to initiate reforms before crisis leaves them no choice.
It is needless to reiterate that the existing obligations to current retirees and serving employees must be honoured, but future liabilities must be shifted toward funded, transparent, professionally managed arrangements, as mentioned above.
Pakistan must also reform its pension administration and integrate it under a single national digital architecture. The pension funds and its assets must become long-term investors in Pakistan’s own economy rather than a permanent claim on its taxpayers.
We are facing two stark choices: either we allow unfunded liabilities to expand and leave successive governments to make unexpected and painful adjustments, or we embrace measured reform, safeguard the dignity of retirees, develop domestic capital markets and make resources available for the next generation.
The first choice preserves yesterday while the second choice builds tomorrow. The future will not judge Pakistan by the promises it made yesterday, but by whether it possessed the courage to maintain them without compromising tomorrow.
The writer is a political economist, public policy commentator and advocate for principled leadership and regional cooperation across the Muslim world.