Concerns over long-term fiscal sustainability of social security programs are growing as the country's social security expenditures continue its steep rise. Amid stagnant revenue growth and mounting public debt, the government faces increasing pressure to streamline existing programs and promote a more self-sustaining, contribution-based system.

The High-Level Economic Reform Advisory Commission has urged the government for reforms that balance economic capacity with social protection obligations. The commission has warned that the current system, which relies heavily on government resources, is unsustainable. If the government’s financial position deteriorates, even the most basic social security provisions could be at risk, the commission said in its report. The commission has recommended that the government align social security benefits with the country’s economic reality and fiscal capacity.

The Khanal-led commission has recommended expanding contribution-based social security schemes to ease pressure on the national budget. According to the report, doing so would mobilize domestic savings—an essential driver of capital formation and economic growth. Furthermore, it has advocated eliminating overlapping functions among the Employees' Provident Fund, Citizens' Investment Fund and Social Security Fund, and investing their pooled resources in high-return ventures. This, the commission has argued, would strengthen the economy and deliver better returns to contributors.

In addition to direct cash transfers, the government also allocates significant resources to various other social security schemes, including medical insurance and subsidies, which further strain the state’s finances. This spending continues to rise, even as revenue collection falls short of targets and the government grows increasingly dependent on domestic and external borrowing.

Social security expenditure has been rising steadily with each passing year. In the Fiscal Year 2012/13, it stood at Rs 31 billion—equivalent to 1.6% of GDP and 8.7% of total government expenditure. By 2022/23, it surged to Rs 219 billion, representing 4.1% of GDP and 15.4% of total government expenditure.

In the current fiscal year 2024/25, the government has allocated Rs 298.57 billion —approximately 15% of the national budget—for social security.

As spending on social security programs, including allowances grows, the government is finding it increasingly difficult to manage the financial burden. The Social Security Allowance program, first introduced by Finance Minister Bharat Mohan Adhikari when UML was leading the government, was later expanded in a competitive manner by finance ministers from both the Nepali Congress-led and Maoist-led administrations.

The composition of social security spending has also shifted significantly. In 2012/13, around 34% of social security expenditures went toward allowances; by 2022/23, this had risen to 53%. Pensions and employee retirement benefits accounted for 44% percent, or around Rs 97 billion, of total social security spending in 2022/23. Overall, social security expenditure constituted 26.5% of current government expenditure in 2022/23, up from 23.7% in 2019/20.

Policy Overhauls to Reduce Fiscal Load

The commission has recommended developing integrated statistics on social security by linking all types of benefits to the national identity card. It has also advised consolidating data from provincial and local governments into a unified system to eliminate duplication in social security programs. The commission has recommended assigning the Ministry of Labor, Employment and Social Security the responsibility of collecting, managing and maintaining this integrated database.

Another key recommendation from the Khanal commission is amending the Social Security Act, 2018. The commission has proposed to increase the eligibility age for the elderly allowance from 68 to 70 years and raising eligibility age for Dalit and single women and senior citizens from the current 60 to 65 years. It has also recommended that no new allowances be introduced through the federal budget beyond those already specified in the Social Security Act.

In a move likely to challenge political consensus, the commission has proposed freezing social security allowance increments for the next five years. “No increments in social security allowance for the next five years, and thereafter, adjustments should occur only every two years based on inflation,” the commission said in its report.

These recommendations reflect growing concern over the state’s ability to sustain the financial burden of social security schemes. Despite fiscal strain, successive governments have expanded the scope of social security coverage and added new beneficiaries. For instance, during the fiscal year 2021/22, the KP Sharma Oli-led government raised all social security allowances by 33% percent, increasing the elderly allowance from Rs 3,000 to Rs 4,000 per month. A year later, the Sher Bahadur Deuba-led coalition government lowered the eligibility age for the elderly allowance from 70 to 68 years. Both decisions, driven largely by electoral considerations, have further burdened state finances.

Another major recommendation is to raise the mandatory retirement age for government employees from 58 to 60 years across all levels. According to Ministry of Finance officials, increasing the retirement age in the civil service alone could save Rs 23 billion annually. If this policy is extended to the army, police, public enterprises and other public services, it could result in total savings of Rs 50-60 billion per year.

“Civil service law is an umbrella law. Similarly, the retirement age is set at 58 for the Nepal Police, Armed Police Force, Nepal Army and public corporations,” said Finance Secretary Ghanashyam Upadhyay, during a recent meeting of the subcommittee under the State Affairs and Good Governance Committee of the House of Representatives. “Once this law is enacted, deferring pensions and retirement benefits for various civil servants by a year could save Rs 50 to 60 billion annually.”

Fixing the Health Insurance Crunch

The government’s health insurance program, which now covers 7.7 million Nepalis, is under severe financial pressure. As the program’s scope expands, the government is struggling to pay insurance-related liabilities on time. In response, the commission has recommended introducing a health tax on tobacco, cigarettes and alcohol products.

“To meet current health insurance liabilities and ease the growing financial burden, the commission suggests introducing a health tax on tobacco, cigarettes, and alcohol—products known to be harmful to health—and allocating the revenue to the insurance fund,” the report states.

The government’s failure to meet health insurance obligations on time has widened the financial gap. In 2022/23, claims totaled approximately Rs 13.13 billion, but only Rs 11 billion was disbursed. Despite this shortfall, only Rs 7.5 billion has been allocated for fiscal years 2023/24 and 2024/25—far below the actual needs.

To further strengthen the system, the commission has recommended increasing the health insurance premium from Rs 3,500 to Rs 5,000 and managing the collected funds to ensure higher returns.

The commission has also proposed a 1.5% social security tax on all salary and wage payments, to be deposited into the social security fund. Additionally, it has recommended expanding the contribution-based social security system to include workers from the informal sector.

While social security remains a vital pillar of public welfare, its unchecked expansion poses a serious risk to fiscal stability. Moving toward a contribution-based model, improving efficiency of the program and aligning policies with the country’s economic realities could help preserve Nepal’s social safety net for future generations.

As public debate over these reforms gains momentum, one thing is clear: bold and difficult decisions will be required to balance compassion with fiscal prudence. Whether political leaders will heed the commission’s warnings and act decisively remains to be seen.

(This article was originally published in  May 2025  issue of New Business Age Magazine.)