Sustainability of the Public Servant’s Pension Scheme in Sri Lanka

Abstract

Despite the global trend towards defined-contribution pension schemes, many public service pensions continue to follow defined-benefit structures, imposing a significant fiscal burden. This paper analyses the main public sector pension scheme in Sri Lanka in a context where the population is ageing rapidly and the government faces strong fiscal constraints. The study aims to forecast the costs of the Public Servants’ pension scheme and quantitatively evaluate policy options for improving fiscal sustainability. The study extends the model of Rannan-Eliya et al. (1998) using detailed data on the number and age structure of pensioners as well as information on public sector wages, inflation, and GDP growth. The model’s output is validated using observed pension costs from 2016-2022, and projections and policy simulations are carried out for 2023-2027. The study finds that expenditure on the scheme is estimated to increase by 6% annually and 10% over the next five years in real terms. Reducing the generosity of pension payments, raising the retirement age, suspending gratuity payments temporarily, and reducing the replacement rate for new retirees result in significant reductions to the annual pension bill, although the latter two options are unlikely to be politically feasible.