State pay to retirees falls by Sh36bn amid cash crunch

BDStressed (1)

Treasury’s payments to retired civil servants have dropped by more than a third or Sh36.9 billion in the nine months to March. FILE PHOTO | SHUTTERSTOCK

Treasury’s payments to retired civil servants have dropped by more than a third or Sh36.9 billion in the nine months to March amid a cash squeeze that points to delayed disbursement of State pensions.

The pensions department paid Sh54.48 billion to retired civil servants in the period to March compared to Sh95.4 billion in a similar period a year earlier, reflecting a drop of 38.71 percent in an economy where an average of 21,000 State employees retire annually.

This is the first drop in pension payments since Kenya started making monthly public spending in 2013 and the smallest payout since 2019.

Analysts link the drop to delayed payment of fresh retired civil servants, who are paid a monthly pension and lump sum or gratuity, which has the effect of bumping up the cost of the retirement benefits.

Payment of retirees already on the State payroll is considered a priority payment together with the President’s salary and debt repayments.

The government said it failed to pay civil servants’ March salaries on time, a delay that signals a liquidity strain for a government facing unprecedented financial obligations, including to payment of creditors.

The cash crunch emerges in a period when the retirement of over 20,000 civil servants annually from 2018 is burdening taxpayers as the Treasury raised the red flag over the rising expense.

The pension expenses triggered by the mass retirements, which have also brought home a job crisis in the ageing civil service, have joined debt expenses in denying the State cash it requires for critical spendings like roads, health and water supply.

The Treasury has issued an alert over the mounting pension bill, warning that the expense is a risk to the Budget.

The Treasury forecasts it will spend Sh172 billion in the year ending June for pension payouts, rising to Sh153 billion a year earlier and Sh32.3 billion in 2015.

Treasury Cabinet Secretary Njuguna Ndung’u has classified pension liabilities, alongside debt repayment costs, amongst major fiscal risks giving President William Ruto’s administration an unrelenting headache.

“With the increasing number of retired officers, dependants and the increased life expectancy rate, the pension wage bill has been rising exponentially posing a fiscal risk,” Prof Ndung’u wrote in the 2023 Budget Policy Statement (BPS), a document that provides expenditure guidelines for the government.

“To further mitigate the fiscal risk, the government will ensure timely remittance of the required contribution to defined contribution schemes to reduce possible litigation costs and encourage appropriate investment choices.”

Dr Ruto won a hotly contested election last August on a platform of planning to lift millions out of poverty, but he is facing challenges from the high cost of living and growing debt repayments.

The debt burden, compounded by a weakening local currency and international market turmoil precipitated by a banking crisis, has caused some market participants to speculate that Kenya could soon default like Zambia and Ghana.

But the President's chief economic adviser, David Ndii, says Kenya has no plans to go down that route.

Pension payments for the nine months to March represent 33.88 percent of the Sh172.64 billion that the Treasury budgeted for the current financial year.

That is the lowest rate of payment of the dues to the country’s senior citizens since the Treasury started making public the monthly expenditures from the government’s main account in line with the Public Finance Management Act.

It is also the first year-on-year drop, based on publicly available data, excluding the peak of Covid-19 when movements were curtailed, hurting the processing of the claims.

The current fiscal year’s budget for retirees comprises Sh73.85 billion in lump sum pay (commuted pension), Sh66.55 billion in ordinary pension and Sh31.90 billion in contribution to the public service pension scheme.

Civil servants, unlike workers in the private sector, were until January 2021 not contributing to their pensions.

The Treasury rolled out a pension scheme where public service workers aged below 45 initially contributed two percent of their gross pay towards their retirement savings in 2021, rising to five percent in 2022 and 7.5 percent from this year.

The government contributes 15 percent of the gross pay of the public service worker.

Under the Public Service Superannuation Scheme (PSSS), workers who resign from public service are entitled to pension benefits after five years with no age restrictions.

This is unlike the previous scheme where it took 10 years from the time a worker resigned from the government to get benefits, or on the attainment of the age of 50.

Civil servants are free to increase their contributions to a rate above 7.5 percent of their pay, but the government share remains intact.

The rollout of the contributory retirement plan, after a delay of more than eight years since the Public Service Superannuation Scheme (PSSS) Act became law, was expected to ease pressure on taxpayers.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.