By: Staff Writer
December 28, Colombo (LNW): The non-contributory structure of Sri Lanka’s Public Services Pensions (PSP) scheme has become a major financial burden on the nation, as pension payments are entirely financed through government revenue via general taxation, according to a study by the Institute of Policy Studies (IPS).
“With around 700,000 public sector pensioners, the system places a significant fiscal strain on the government,” the IPS report highlights.
Notably, nearly half of these pension payments benefit the wealthiest 20% of the population. IPS suggests implementing a gradual shift to a contributory pension model alongside broader structural reforms to alleviate this strain.
Addressing Sri Lanka’s pension-related financial challenges requires structural reforms and transitioning to a contributory scheme, particularly given the country’s recent economic difficulties.
Public sector pensions, which are entirely funded by tax revenue, account for 12% of government income, creating significant pressure on public resources. Moreover, the current PSP scheme is largely regressive, benefiting higher-income groups disproportionately.
The IPS estimates that nearly 50% of PSP payments go to the wealthiest 20% of households, while only 11% reach the poorest 40%. This inequality diverts critical resources from essential sectors like healthcare and education, further deepening inefficiencies in public spending.
The PSP scheme, Sri Lanka’s largest pension program for permanent public sector employees, has seen growing financial demands over the years. By 2023, pension payments totaled LKR 372.3 billion (approximately $1.15 billion), making up 7.9% of recurrent government expenditure and 12.1% of its total revenue.
Additionally, the number of pensioners has risen significantly, with total pension payments increasing by 20.5% in 2023 alone, driven by a 4.2% net growth in pensioners. This rapid growth is unsustainable given the country’s constrained fiscal capacity.
Currently, 43% of government revenue is allocated to public sector salaries and pensions, leaving little room for critical investments in innovation, training, and infrastructure development.
The economic crisis of 2022 exacerbated these challenges, as revenue shortages disrupted essential services, including public sector salaries, pensions, healthcare, and agricultural support like fertilizer.
The PSP disproportionately benefits high-income groups, as nearly 44% of recipients belong to the richest 20% of the population. A Commitment to Equity (CEQ) analysis further reveals that PSP is not a pro-poor program, reflecting a system that favors well-off segments of society.
Public sector employees, who constitute 15% of the workforce, enjoy stable incomes and pensions throughout their careers.
This stands in stark contrast to the 67% of Sri Lankans engaged in informal, precarious employment.
