By Fazeel Asif.
Pakistan’s fiscal debates follow a familiar script. Tax collection is too low. The IMF programme is fragile. Debt is rising. Exports are weak. These problems are real. But one of the most consequential threats to the country’s financial future sits largely unexamined: the pension bill. It is growing faster than the economy. It has already overtaken the development budget. And it will not slow down on its own.
In FY2026-27, the federal government has allocated PKR 1.169 trillion for pensions. That is 11 percent more than the previous year and more than the entire federal development budget of PKR 1 trillion. Pakistan is spending more on retired civil servants and military personnel than on roads, dams, hospitals, and schools combined.
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Add the provinces and the figure doubles. Punjab will spend around PKR 500 billion on pensions this year. Sindh, PKR 180 billion. Khyber Pakhtunkhwa, PKR 120 billion. Balochistan, PKR 60 billion. The combined federal and provincial pension bill has crossed PKR 2 trillion annually. Punjab’s pension expenditure now approaches the level of its own source revenues. Several public sector entities spend a larger share of their income on retired staff than on delivering any service at all.
The pace of growth is the real problem. In 2010, the federal pension bill was PKR 70 billion. Today it exceeds PKR 1.1 trillion. That is a 1,500 percent increase in sixteen years. The State Bank of Pakistan documented average annual growth of around 18 percent between FY2011 and FY2021. PIDE has placed the current growth rate at around 25 percent per year. At that rate, the pension burden doubles roughly every four years.
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The trajectory, if nothing changes
Federal bill only, derived from PIDE and SBP documented growth rates. Combined federal and provincial figures would be substantially higher. 2050 figure based on PIDE projection of 56 percent of current expenditure.
By 2030, four years from now, the federal pension bill could reach PKR 2.5 to 2.8 trillion. That is before provincial obligations are counted. By 2040, it could absorb between a quarter and a third of all current federal expenditure. By 2050, PIDE projects that pensions will consume 56 percent of the federal budget. Defence, development, education, and healthcare would have to compete for what remains. Pension spending as a share of GDP is projected to rise from 1.2 percent today to around 3.5 percent. PIDE calculates this shift could reduce economic growth by roughly 4 percentage points through higher deficits and taxation.
How did Pakistan get here? The system itself is the problem. Pakistan runs a non-contributory, pay-as-you-go model. Today’s taxpayers fund today’s retirees. Nothing is set aside for the future. This was manageable when life expectancy was lower and the public sector was smaller. It is not manageable now.
The State Bank has identified the drivers: generous replacement rates, retrospective salary revisions, pension increases that automatically follow every public sector pay revision, commutation benefits, restoration provisions, and a pool of retirees that is both growing and living longer. Military pensions compound the pressure. Roughly seven rupees in every ten of the federal pension allocation go to retired armed forces personnel. Early retirement ages mean military pensioners draw payments for twice as long as civilian retirees. This is not a criticism of what soldiers are owed. It is an observation about what the current structure costs, and what it will cost by 2040.
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Younger Pakistanis are paying for this. Many of them will retire into a system that has already been hollowed out by the time their turn comes.
The government has taken some steps. A contributory pension scheme was introduced for newly recruited civilian employees in 2024. The FY2026-27 budget extends a similar framework to newly recruited armed forces personnel. Both decisions move in the right direction. Neither addresses the accumulated stock of existing liabilities. Neither changes the structural drivers pushing costs higher each year. The reforms protect the future marginally. They do not fix the present.
Pakistan has known this was coming. A Pension Review Working Group recommended a funded contributory system in 2003. The National Commission for Government Reforms repeated the recommendation in 2008. Successive governments let it pass. The bill for that delay has arrived, and it compounds annually.
Four things need to happen.
First, the transition to contributory pensions must be accelerated across all levels of government. Employer contributions must be built in. Legacy liabilities need a transparent management strategy, not continued deferral.
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Second, pensionable salaries must be capped. Pension increases must follow a defined indexation formula. The practice of automatically lifting pension obligations every time public sector pay rises must end.
Third, retirement ages need to be reviewed. Life expectancy has risen. Pension durations have lengthened. The arithmetic no longer works at current retirement thresholds.
Fourth, Pakistan needs a professionally managed sovereign pension fund. Pre-funding future liabilities is the only way to reduce pressure on future budgets. It requires discipline now, not after the crisis deepens.
None of this will happen easily. The beneficiaries of the current system are organised. They have institutional weight. The people who pay for the system are younger, less organised, and less visible in the political process. That imbalance is why reform has been deferred for twenty years.
But deferral is now the most expensive option on the table. Pension spending already exceeds the federal development budget. Debt servicing and defence absorb the majority of federal expenditure before a single rupee reaches a school or a hospital. Pensions are the fastest-growing claim on what little fiscal space remains.
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Pakistan has a young population. That is an asset. It should be generating investment, productivity, and growth. Instead, a rising share of public resources is being transferred to finance obligations from the past. The IMF has flagged pension liabilities as a growing fiscal risk. At some point, external pressure will force the decisions that domestic politics has repeatedly avoided.
The 2030 numbers are four years away. The 2040 numbers fall within the working lives of graduates entering university today. The 2050 figures will arrive in the careers of children currently in primary school. Every budget that defers this reckoning increases the bill. The question is not whether Pakistan reforms its pension system. It is whether Pakistan chooses to do so now, on its own terms, or waits until there is no choice left.
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By Fazeel Asif. He can be contacted on: Fazeel63@gmail.com.
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