WB suggests increase in retirement age to cut pension expenses

ISLAMABAD: The World Bank has recommended an increase in retirement age for government servants to cut the growing pension cost of the country.

“Many countries have increased the pension eligibility age to 65 and we would also recommend that the authorities consider such a parameter in the medium-term. It is also important to note that applying an actuarially fair reduction or increase in the retirement benefit is a means of enabling individuals to have added flexibility to retire at the age which is most appropriate to their own circumstances and needs,” reads the WB report submitted to the finance ministry.

According to the report the total implications of a gradual increase in the retirement age are complex and include both the effects on pension costs as well as wage and other benefit costs. During a transition period, total wage and pension costs go up as more is spent on wages and allowances even though the pensions cost may be slightly reduced. Over time, increasing the retirement age moderates pension costs, to the degree that new hires have been adjusted during a transition period.

The projected effect of increasing the retirement age from 60 to 63 would be to reduce pension costs by between 0.5% and 1.0% of fiscal revenues over the projection period, the report said, adding, “A sharp decline in costs for just for pensions is projected in the short-term as new retirees are kept in the government’s employ. As indicated, the savings in pensions can be offset by increases in the civil servant wage bill unless hiring is reduced to offset the reduction in new retirees.”

It said that after the initial drop, the savings from the increase in the retirement age are projected to be less than 1% of fiscal revenues though do increase after many years. “One of the reasons for the limited fiscal savings in this scenario is that we modeled an option of having individual who retire 3 years later accrue an additional 3 years of service.”

According to the report, generally civil service schemes set the eligibility age by also considering the nature of the work involved, the life expectancy at retirement, and the overall finances of the scheme. As a result, there is no benchmark eligibility age that should be considered.

“The authorities should consider an increase in the eligibility age by considering the anticipated years in retirement for civil servant retirees and the fiscal burden of the age chosen. Most countries increase the eligibility age gradually in an effort not to have adverse effects on individuals close to retirement. For example, some countries may increase the eligibility age at a rate of 6 months per year so that the provision that enables workers to retire after 25 years of service (sometimes as early as at age 45), could increase to age 60 only over 30 years.”