With multiple State governments announcing reversion to the old pension scheme (OPS) and some more speculating to do the same, the debate on pensions is hotting up. Most economists have frowned upon this arguing that this is bad economics on at least two grounds. Firstly, since the State has to bear full burden of pensions, it will become fiscally unsustainable in the medium to long run. Second, such an unsustainable rise in pension allocation in the Budget can only come at the cost of other more pressing welfare expenditures allocated to the poor and marginalised sections. The OPS, therefore they argue, is a case of elite workers gaining at the cost of their brethren lower on the income ladder.
Both the arguments assume the fiscal revenues to be fixed, which need not be the case if the government has its priorities right. Instead of rationalising necessary expenditure, the government should rationalise taxes, say by implementing inheritance and wealth taxes, which are either negligible or non-existent in India. But let us leave this aside.
Public sector workers are asking for a guaranteed pension in place of the new pension scheme (NPS), which fluctuates according to the returns prevailing in the market. They are not freeloaders wanting the State to fund their post-retirement lives. We believe that they can deduct employees’ contributions towards pension during the working life, but can give them a guaranteed pension after they retire. The workers would readily accept such a contributory guaranteed pension scheme (CGPS), a blueprint of which we present in this piece.
Let’s say the employees continue contributing 10% of their basic pay monthly as they do now under the NPS but the State promises to pay a pension of 50% of the last drawn salary which is adjusted for inflation, exactly as the OPS would have. The critical difference between the OPS and the CGPS is that a large part of the latter will be funded by the employees themselves as against no contribution in the former. And the State pays an additional balance of the difference between the 50% guaranteed pension and the market determined pension amount.
The upside is that if the market return happens to be higher than this, the State gets to pocket that. It may well be that on balance (with State gaining when returns are higher as against it paying the difference when they are lower), the additional burden on the CGPS (compared to the NPS) may be marginal. After all, the economic argument of those defending the NPS is that the returns in the market do not stay the same, so it may actually turn out to be better than the OPS. The point is, why should this entire burden of uncertainty fall on employees alone and not be shared by their employers?
The chart compares the three schemes — the OPS, the CGPS, the NPS — keeping the OPS as 100. We take 40% as annuity of the NPS corpus and project the amount a worker would get depending on two rates of return — 9% (the average rate of return currently prevailing) and a hypothetical 12%. One could ask why are we calculating the pensions only on 40% of the corpus and not the entire corpus. There are two reasons. Firstly, there is an upper limit to how much you can withdraw from your pension corpus at the time of retirement, which is 60% currently. Second, under the OPS, apart from pension, there was a component of contributory provident fund (CPF), which amounts to almost 60% of the pension corpus of the NPS. In other words, the CPF of the OPS cancels out the 60% withdrawal from the NPS corpus. Apples should be compared with apples, which is what this chart does.
Two things stand out from this chart. Firstly, when the market return is 9%, the State ends up paying the gap, i.e. 28, but when the return is 12%, it gets to pocket the extra 58. Second, under the CGPS, the burden is only the employer’s contribution part, exactly as in the NPS. The CGPS gives guaranteed pension to the employees without putting the exchequer under additional burden necessarily.
A few riders are in order here. With the setting up of the special task force to rationalise pensions by the Union government, there is growing speculation that the government may come up with a guaranteed pension of 30% (not 50%) of the last salary drawn and that too not adjusted to inflation. This would be grossly unfair on two counts. Firstly, 30% fixed pension (60% in our case) would give the employees even lesser pension than what they would get under the NPS. Second, the NPS is inflation-covered because under normal circumstances, the returns are higher than the inflation. So, even though they may not be inflation-indexed, they cover for rising prices. So, a 30% pension, despite guaranteed, gives you both a lower amount when you retire and its real value keeps on falling over the years, so it is a double whammy for the employees.
Our proposal of inflation-indexed CGPS of 50% of last salary drawn addresses both these issues without adding to the fiscal burden necessarily. And by inference, it does not cut into the share of other social welfare schemes. It’s a win-win for all the stakeholders.
(Rohit Azad teaches at Jawaharlal Nehru University, New Delhi. Indranil Chowdhury teaches at PGDAV College, New Delhi)
