Unfunded pensions could add 25-pct to Sri Lanka’s national debt: economist
COLOMBO (EconomyNext) – Sri Lanka’s unfunded public service pension liabilities may add as much as 25-pct to national debt, and the problem is aggravated by an ageing population and new pension schemes promised by politicians to all and sundry, an economists has said.
Sri Lanka’s central government debt was officially 75.5 percent of gross domestic product, not counting sovereign guaranteed debt to non-revenue agencies such as the Road Development Authority as well as some state enterprise bailout bonds.
"Actually that becomes meaningless, because the pension debt can be much larger,"
Because state worker pensions are not funded, the liability is not readily visible but annual pension payouts have risen from about 50 billion in 2005 to 130 billion by 2014, Nishan de Mel, head of Verete Research, a consultancy said.
The pension payouts ranged from 1.5 percent to 2.0 percent of GDP.
Though there were different ways of calculating the pensions liability, which gave large numbers, simply taking the pensions payouts as debt service cost would add 15 to 25 percent to national debt, de Mel said. And it was growing. The number of state pensioners had grown from 418,000 in 2005 to 546,000 in 2014.
"Effectively while we are talking about having a 75 percent to 80 percent debt to GDP ratio, we have an invisible debt of about 15 to 25 percent of debt in actual fact," de Mel told a business forum organized by Asia Securities, a Colombo-based brokerage.
"It is a liability accrued against future taxes and we are paying it. But because it is hidden from the books it does not come into macro-economic analysis."
De Mel said civil service pensions was fixed at 90 percent of the last basic salary of a state worker (of late there are more non-pensionable allowances to salaries) effectively inflation adjustments were given every year or at election time.
A 10 percent increment added tens of billions in pension liabilities for several decades. The revised 2015 budget projected pension payments this year at 159 billion rupees.
But Finance Minister Ravi Karunanayake told reporters last week that a pension anomaly adjustment which was approved at 5.5 billion rupees for 2015 was now found to be 24 billion rupees.
A 2002-2004 administration tried to create a funded civil service pension scheme, but sections of the elected ruling class going by the labels of the Janatha Vimukthi Peramuna and Sri Lanka Freedom Party, scuttled the move.
"The advantage of offering higher levels of pensions is that the politician who offers higher levels of pensions does not have to put money where his mouth is," de Mel said.
"You do not actually have to balance your books, because the budget does not say what the notional pension debt is. And it is unfunded debt.
"So politically it becomes easy to keep promising pensions and if you looked at budgets in Sri Lanka in the last four five years, you notice that budgets are full of new pension schemes. Pensions schemes to farmers, to fishermen, recently pension schemes to trishaw drivers
"So we are proliferating unfunded pension schemes because we do not have to put the money upfront."
De Mel said an ageing population will make the problem worse.
About 50 percent of Sri Lanka’s workforce was above 40 and the civil service became pensionable at 55 years.
"So the people who are coming up for pensions, are coming up rather quickly," de Mel said.
Sri Lanka’s civil service was also bloated and is counts among the highest burden on ordinary people, analysts have said.