The unbalancing act

July 26, 2020

Pays and pensions reforms are long overdue but a hasty action can create more problems than it might solve

The recent attempt by the government to radically reform the public sector pays and pensions system has created unrest among its employees. Fuelled by leaked reports and rumours, there is a growing perception that the state is trying to push government employees to the wall at the behest of international lending institutions.

In April, the Finance Ministry had constituted a Pay and Pension Commission to evaluate the current salary and pension scheme and recommend changes. The commission, headed by former finance secretary Wajid Rana, has six months to complete the task. In May, the federal government introduced the Civil Servants (Directory Retirement from Service) Rules 2020 with the (stated) objective of getting rid of incompetent officers by forcing them to retire early. In June, the government decided not to grant a pay-raise to its employees in the federal budget.

The recent references to ‘the huge pension payments burden’ on the national exchequer and suggestions to streamline the system have heightened the nervousness among government employees. This reaction should come as no surprise. They rightly fear being the potential losers in this reforms process. Surprisingly, the government has denied that there is any proposal to drastically change the system.

When contacted by The News on Sunday, the Institutional Reform Cell, established at the Prime Minister’s Office, denied any such proposal. “As of now, no proposal is at advanced stage regarding pension. The Finance Department notified a Pay and Pension Commission in April, and it is likely to issue its report in six months,” the director general of the cell said.

However, several proposals for pension reforms have been on the table for a long time. The key sponsor - the World Bank - has been nudging the policymakers towards a multi-pillar pension system. Similar reforms undertaken in a number of developing countries have had mixed results at best.

In Pakistan, we are already very late in rationalising the social protection system in which old age wellbeing is one of the key pillars. The governments have been aware of the fiscal challenge posed by the existing pension scheme for several decades. It was more than 20 years ago that the government started talking about voluntary pension schemes to eventually cover both the public and the private sector. They took a decade to come up with a law (in 2007) that has been left largely unimplemented.

The delay was caused by a combination of factors including a lack of political will. There was also an inability among key decision makers to realise that old age wellbeing was above all a citizens’ right and that government servants were only a part of the older persons’ community.

Having an honest debate on the complex, politicised issue is even more important for the current government on account of the general feeling that it is either not interested or not capable of undertaking any serious governance reform. A retreat from discussion can actually hurt the prospects of success of the reforms commission which could also become a victim of the same mistrust as the current reform initiative.

The state can only renegotiate rational pension levels with government pensioners once it adopts the principle of minimum universal pension as a citizens’ right. Otherwise, the civil servants would ask that military pensions be revised first and the military would ask for the leakage from the public sector development projects and public sector enterprises to be stopped first.

A cabinet committee headed by Dr Ishrat Hussain has also been meeting every week and has made slow but considerable progress on some accounts. It has, however, been unable to create confidence in its performance among the relevant stakeholders. Now, the committee has an enhanced mandate, as all governance reforms matters pass directly to the cabinet through it. However, it has not asked the basic questions about the nature of the social compact which needs to exist between the state and citizens.

This government, like the previous ones, has failed to link remuneration with performance. After toying with the proposal to enhance the salaries of officers from the savings resulting from abolition of the long-unfilled posts, the government has tossed the ball to the Pay and Pension Commission. Mistrust plagued the commission from day one. It was widely believed that the commission has been established to buy time as the government was not in a position to raise the salaries this year.

The coronavirus emergency has exposed the extremeness of social protections in the country. Barring the minimum protection available to nearly 5 per cent of all formal sector labour and the BISP transfers, most of the Pakistanis have been left to fend for themselves or look for alms.

Old age benefits are not a privilege, even if - as is the case in Pakistan - they are rooted in the politics of patronage and influence. It is very hard to negotiate a privilege if it is being enjoyed by an important group for long enough. The state can only renegotiate rational pension levels with government pensioners once it adopts the principle of minimum universal pension as a citizens’ right. Otherwise, the civil servants would ask that military pensions be revised first and the military would ask for the leakage from the public sector development projects and public sector enterprises to be stopped first.

The government servants have been surprised by the spectre of reduced pensions as they had believed that the Pay and Pension Commission had been established basically to enhance their salaries. There were high hopes among pensioners also that their pensions would go up. Using the commission as an escape route to delay the salary raises was unfair. The government should not need an excuse to enhance the salaries of its employees.

Many of the government servants wait for their retirement benefits to build a house. The award of pensions itself is not an issue. However, the continued payment of salary to unnecessary staff and officers is a burden. Also, we make these payments by incurring fresh loans.

The pandemic provided an opportunity to give a big push to e-governance and shed the extra burden from the wage bill, particularly among the support staff. The fiscal sustainability of pensions is a real issue and the government should address the distortions and anomalies in the current system and make them funded.

The procrastination in stopping the fiscal bleeding is rooted in the realisation that people join government service, particularly, in Grades 1 to 16, to buy life-long social security. Pension is an important part of this equation. The first major step to reform should be disconnecting pension from the pay.

Every Pakistani who crosses the 60 years mark should have two rights on the state: a minimum social protection as a responsibility of the state against hunger, destitution and disease and a mandatory pension contributions system for all kinds of work. If the government starts today with honesty and clarity of purpose, we can have a new system to replace the old one without much harm and friction.

It is easier said than done because the provision of social protection is unfortunately a part of the politicking. The political parties will try hard to keep giving selective social protection if it helps them win elections.

Making social protection a pawn in a political game is a sad failure of imagination on the part of the political parties, particularly the PTI.

We continue with limited social protection through government jobs and charity without addressing the root causes of social disparities and social exclusion. Past governments have been accused of distributing government jobs and enhancing the salaries without linking them to the performance and the benefit. Instead of taking pension reforms as a subset of a comprehensive reform of the old-age benefits regime, the current government wants to continue with selective fattening of the few and pushing the rest to penury.

By hiring new employees without pension, the government will be repeating what it allowed to happen in the private sector. The Social Security and Old Age Benefit regimes introduced in 1967 and 1976, respectively, promised both the security of job and benefits to the labour. The industry succeeded in getting labour market flexibilities by getting the powers of hire-and-fire by switching over the contractual labour.

Enterprise unionism in Pakistan succeeded only in large public sector enterprises. However, the cost of its success became one of the major reasons of its downfall. Again, the governments, which had given the jobs in PSEs as a political favour in the first place, could not rationalise the pay and pension bills and waited for crises or crashes to initiate necessary reform.

The speed and vehemence with which Dr Ishrat, Arbab Shahzad and Wajid Rana have denied the existence of a pension reform proposal, bodes ill for the system. The furore among the government servants should make them realise that it is only the principle of minimum social protection to all the citizens of Pakistan, including the universal old-age benefits, which would help grow a consensus out of the hopeless situation that we have brought ourselves to.

Fiscal constraints cannot go far as a pretext to revamp the pension system. If the government can show a genuine empathy towards every Pakistani in terms of old-age benefits and put in place an efficient administrative arrangement to universalise the minimum old age benefits, the government servants would not be so afraid of reforms.

The desire for security is a universal instinct. However, the government servants should also realise that a pension akin to pay cannot continue. They should have better pays and then use those to contribute to their pension funds.

With some initial financial support, like the entire salary raise going to the contribution to pension for the first year, the government should make it mandatory for all who work, in public or private sector, to adopt a contributory social insurance.

In case of the low-paid employees and workers, the government could pay a matching contribution. The minimum old age benefit to the ones already old without a pension and the ones entering into old age over the next 10 years could be financed by reintroducing the tax on the new high-worth individuals.

The legitimacy of the government, particularly after the financial crisis, is linked more and more to the state’s capacity to provide minimum social protection to all citizens at all times. We are very late in this regard. However, the pandemic has given the government fiscal flexibility and a huge opportunity for reform. It should use the additional resources to win back the trust of the citizens.

The writer is a retired Cabinet special secretary and former member governance of Planning Commission. A PhD from France, he is currently the executive director, Social Protection Resource Centre, Islamabad.

The unbalancing act: Pays, pensions reforms are long overdue but hasty action can create more problems than it might solve