Efficient Retirement Policy

Fundamental laws of economic efficiency suggest that individuals that are more productive should work more and retire later than their less productive peers. While from practicality point of view, there must be some methods to evaluate the employment history to determine how early an employee must retire. However, in the bigger picture, the government cannot use policies contingent only on productivity and cost of retaining employees. As these policies, have wide range implications on unemployment, public expenditures and the welfare goals of the government.

Repeatedly, at least over the past few decades, there have been proposals from the bureaucracy for increasing the retirement age to 62 years from 60 but federal and provincial governments have turned down such proposals mainly because of political incentive in providing jobs to growing younger population. On the top of it, along with other stringent measures in the new budget government is reluctant to increase the salaries to appease the impact of 100 percent raise in salaries by PPP government.

As part to reform program IMF has advised government to increase the retirement age to 62 and to contain pension bills. As Pakistan’s federal expenditures on salaries and pensions is estimated about Rs 450bn, including pension expenses of about Rs. 171bn for the current financial year. The provincial pay and financial bills are much higher than the federal bill. 

“Public wage bill reforms should target the structural change that strengthen the link between pay and productivity, improve hiring process and ultimately raise efficiency in the provision of public services” said the IMF, adding that the increase in wage bill must commensurate with the provision of public services and growth.

In order to contain government expenditures, the pension component of an optimal policy should be based on the present value of lifetime retirement cost linked to the age of retirement. Such a policy may undo part of pension expenditures provided by government but at the same time, there must be careful analysis of the labour distortions and income tax distortions.

In private sector, though retirement behaviour is affected by multiple factors, the average effective age in private sector can be taken as efficient retirement age in public sector. One indicator of retirement behaviour in private sector is the average effective age at which older workers withdraw from the labour force. The effective age depends on multiple factors like old-age benefits, pensions and so on.

Average effective age of retirement versus the official age, 2007-2012

The effective age of retirement in most of these countries is well below the official age for receiving a full old-age pension. The difference between the age for receiving a full old age benefit and age of retirement can because of decrease in employees’ productivity and that create space for other productive employees.  However, Japan and Korea are notable exceptions where the effective age of retirement is close to 70 for men despite an official retirement age of 60.

The roots cause of present situation of salaries and pension expenditures lies in ever increasing number of employees in public sector, particularly that of provincial governments. The incomes of provincial governments are not increasing at rate commensurate to the increase in salaries, pensions and overall expenditures. The increase in retirement age from 60 to 62 years, though in line with the retirement age in most of the countries, would bring only momentary cut down in the salaries and pension expenditures. More distressing is the rapid increase in number of employees, wage rates and other largesse that has been characteristic of every new government that took office.