Pakistan's pension time bomb: How a bloated benefits bill is eating the future

A Trillion-Rupee Burden

In fiscal year 2024-25, the federal government's pension bill crossed the PKR 910 Bn, up from PKR 821 Bn the previous year, and a staggering jump from just PKR 245 Bn in 2016-17. Growing at an average of 19% per annum, this liability is projected to double every four years If left unreformed, actuarial estimates put the defined-benefit obligation for civil servants alone at PKR 2.9 Trn and that figure dates back to a 2021 study, before three more years of compounding. The targeted number for FY26 is PKR 1.055 Trillion with already PKR 753 Bn spent in 9MFY26. This expenditure if not this year is set to cross the 1 Trillion mark in the coming year.

Here is the number that should alarm every Pakistani policymaker: the federal PSDP (Public Sector Development Programme) expenditure for 2024-25 stood at PKR 785 Bn. The pension bill: money paid to people who no longer work is exceeding the entire federal development budget of the country. In a nation with a 60% youth bulge, where over 60 Mn people are under the age of 24, Pakistan is mortgaging its children's infrastructure to fund its retirees' entitlements.

Crowding Out Human Development

The arithmetic is merciless. Every rupee consumed by pension liabilities is a rupee unavailable for education, health, or development.

Pakistan's human development indicators already rank among the worst in South Asia. Over 26 Mn children are out of school. Stunting affects 40% of children under five. Yet rising pension obligations, interest costs, and recurrent administrative expenditure steadily reduce the fiscal space for investment-oriented spending. Development expenditure is "frequently fragmented across hundreds of schemes with weak economic returns," while the pension juggernaut rolls on, untouched and unrestrained.

This is the Achilles heel hiding in plain sight. Pakistan speaks of a demographic dividend of a young population that could power economic growth. But that dividend cannot be harvested if the state is constitutionally incapable of investing in the very people it boasts about. Pensions are consuming what should be classrooms, clinics, and connectivity.

The Architecture of the Crisis

The existing system is a defined-benefit scheme rooted in colonial-era legislation — the Pension-cum-Gratuity Scheme of 1954 and the Liberalized Pension Rules of 1977. Under this structure, the government bears the entire actuarial risk. There is no pension fund, no investment pool, no pre-financing. Pensions are paid directly from the annual budget as a current expenditure, a pure pay-as-you-go model in which today's taxpayers fund yesterday's civil servants.

Several amendments over the decades layered additional allowances onto the pension base, inflating the gross pension replacement rate (the ratio of pension to pre-retirement income) well above sustainable levels. The government recently moved to calculate pensions on the average of the last 24 months of service rather than the final drawn salary, a welcome correction, but one that only slows the bleeding. The structural wound remains open.

What Reform Looks Like: The Numbers

Raising the retirement age is among the most immediate levers available. Pakistan's civil servants currently retire at 60 years Increasing this to 62 or 65; consistent with trends across Asia, would reduce the number of pension recipients, extend the contribution period, and increase the salary base used for pension calculation. Globally, studies suggest that each additional year of retirement age reduces long-run pension costs by 4–6%. Applied to Pakistan's PKR 1 Trn bill, a two-year extension could generate fiscal savings of PKR 40–60 Bn annually in the medium term, while also adding experienced workers to the productive economy.

Transitioning to a contributory defined-contribution (DC) system is the deeper reform. Under the current federal scheme introduced for new recruits after July 2024, employees contribute 10% of basic pay and the government contributes 20%. This is a significant departure from pure defined benefit and will reduce long-run liabilities but only for new entrants. The legacy obligation for existing employees remains an unfunded burden on future budgets.

Voluntary Pension System (VPS) expansion, regulated by the Securities and Exchange Commission of Pakistan (SECP), can extend coverage to the informal sector, self-employed, and private workers, reducing future demands on state welfare systems.

KP Shows the Way

Khyber Pakhtunkhwa became the first province in Pakistan to formally abolish the traditional pension system for new government employees. Formally launched in November 2023, the KP Voluntary Pension System applies to all civil servants who joined provincial service on or after June 7, 2022. An estimated 33,000 employees will be covered under the new scheme, which is regulated by the SECP and managed through the Mutual Funds Association of Pakistan (MUFAP).

The urgency behind this reform is self-evident from KP's own numbers. Provincial pension expenditure grew from PKR 878 Mn in 2003-04 to PKR 132 Bn in 2023-24, a 9,500% increase in two decades, rising from less than 1% of the consolidated budget to over 12%. Under the new system, employees receive a lump sum at retirement drawn from a dedicated, ring-fenced pension account earning investment returns, not from an annual budget scramble. The federal government now needs to replicate this model at scale.

Regional Lessons Pakistan Cannot Afford to Ignore

Singapore's Central Provident Fund (CPF) is the gold standard in Asia. A mandatory defined-contribution scheme, it covers all workers and draws contributions from both employer and employee. Payout begins at 65, with a Supplementary Retirement Scheme (SRS) providing additional voluntary savings with tax incentives. Singapore's retirement system consistently ranks first in Asia on sustainability metrics, precisely because no government budget is hostage to undefined future liabilities.

Malaysia's Employees Provident Fund (EPF) similarly operates as a pre-funded, professionally managed mandatory savings vehicle. In 2012, Malaysia also launched the Private Retirement Scheme to supplement EPF, a voluntary, market-linked tier that grows personal retirement savings outside the state system.

Chile's 1981 pension reform, the original shift from pay-as-you-go to individual defined-contribution accounts became the blueprint for reforms across Latin America and beyond. Chile's AFP (Administradoras de Fondos de Pensiones) system created large pools of investable long-term capital that funded national infrastructure. Pakistan's pension funds, if properly structured and invested domestically, could similarly become engines of national investment rather than drains on the exchequer.

A Reform Agenda Before the Clock Runs Out

Pakistan cannot afford to wait for a pension crisis to materialize before acting. The trajectory is clear: at 19% annual growth, pension spending will consume PKR 2 Trn by 2030. The following reforms, applied together, can bend the curve:

• Raise the retirement age to 62 immediately, and to 65 by 2030. Estimated medium-term savings: PKR 40–60Bn per year.
• Extend the contributory pension scheme to all federal civil servants and not just post-July 2024 recruits with meaningful transition provisions for existing employees. Estimated medium-term savings: PKR 100Bn per year.
• Establish a ring-fenced National Pension Trust, separate from the consolidated fund, with an independent investment board and regulatory oversight by SECP.
• Cap the pension replacement rate at 70% of the 36-month salary average, phased in over five years. Estimated medium-term savings: PKR 32Bn per year.
• Eliminate dual pension eligibility and index pension increases to CPI rather than salary revisions.
• Mandate all provinces to adopt the VPS model for new civil servant recruits by 2026, with federal co-financing for transition costs.
• Open the VPS framework to private sector workers, with tax incentives that make voluntary contributions genuinely attractive. Estimated medium-term savings: PKR 40Bn per year.

The Dividend at Risk

Pakistan's youth are its greatest asset and its most neglected one. With over 60 Mn people under 24, the country sits on a potential demographic dividend that could transform its economic trajectory. But that dividend requires investment: in schools, in skills, in healthcare, in infrastructure. Every rupee that flows into the pension bill is a rupee that does not flow into that future.

The pension crisis is not merely a fiscal problem. It is a statement of priorities, one that says the entitlements of a small, retired civil service matter more than the opportunities of 220 Mn people. Domestically, KP has shown that reform is politically possible. Singapore and Malaysia have shown that it works. Pakistan now needs the political will to act before the Trillion-rupee time bomb goes off.