Is reversing reforms to grab power the way forward for India?
The move to shift from a defined benefit pension scheme or Old Pension System to defined contribution pension scheme or New Pension Scheme was in order to contain the rising and unsustainable pension bill with around 4 per cent of Union Budget already going towards pensionary benefits.
The Congress Party on Saturday released its manifesto in Himachal Pradesh offering largesse -- 300 units of free electricity, restoration of the old pension scheme (OPS) and so on. Freebies are part of recent political culture when a party is desperate to grab power and the ruling party is perceived to be facing anti-incumbency. Freebies more than often at the peril of public exchequer. They ultimately cost the people who shoulder the entire financial burden and diversion of funds would thus mean, less resources available for transformational reforms and poverty alleviation. Political parties, mainly the Opposition, are using the lollipop of restoring OPS by scrapping the New Pension Scheme (NPS) to woo voters, particularly in a state like Himachal Pradesh where government employees and retirees wield tremendous power to sway votes. But this political short-sightedness could be detrimental for the state’s economy as it would put severe fiscal burden on the exchequer.
Many states, particularly those ruled by non-BJP, such as Rajasthan, Chhattisgarh and Jharkhand have already scrapped the NPS and reinstated the OPS for all their state government employees. The fundamental difference between OPS and NPS is their predictability and defined benefits. While a government official is aware of what he would get under OPS, his inhibition with NPS lies in its contributory structure.
OPS applicable for government employees recruited prior to January 1, 2004, get a defined benefit after superannuation, which is at the rate of 50% of the last pay drawn or a 10-month average emolument, whichever is higher. OPS subscribers also get dearness allowance (DA) on pension amount, revision of pension with successive Pay Commissions, additional pension after a certain age, commutation of pension family pension for dependents of several categories etc.
The NPS, however, works on defined contribution basis and it has two tiers – Tier- I and II. Contribution to Tier-I is mandatory for all government servants governed by NPS. Such employees are required to contribute 10% of their pay (basic pay plus DA) and Government makes 14% contribution (w.e.f. 01.04.2019). Tier-II is optional, at the discretion of government servants and no matching contribution is made by the government. It provides for voluntary savings with complete flexibility of contribution and withdrawal of funds.
Political parties must not reverse a transformational pension reform just because they want to grab power. Yes, NPS can be reformed further, and they can suggest, rather than introduce new elements to make a contributory pension scheme more lucrative. It is the more creative way to take NPS forward, rather than reversing reforms and going back to the stone age.
NPS was introduced with certain objective keeping larger interests of the country and its people in mind. With growing aging population, OPS will eventually become a huge burden that will consume all national resources at the cost of other and much needed socio-economic development.
SBI’s research report Ecowrap in March wrote that OPS or pay-as-you-go (PAYG) schemes are a drag on future generations. “The PAYG scheme was in vogue in most countries prior to 1990’s but was discontinued given the problem of pension debt sustainability, an ageing population, explicit burden on future generation and the incentive for early retirement (as the pension is fixed at the last drawn salary). The PAYG scheme thus had no accumulated funds and or stock of savings for pension obligations and hence was a clear fiscal burden. Interestingly, the PAYG scheme is always an attractive dispensation for political parties as the current aged people can benefit from PAYG even though they may not have contributed to the pension kitty,” it said.
One must not forget that politicians, political parties, and political animals do make promises and spurge freebees, but they never pay from their own packets – it is ultimately paid by the people. The money that would be diverted to fund pension bills could be used for other good works – education, health, or poverty eradication. Yes, they can offer to improve NPS and provide strong medical and old-age support systems for the pensioners.
Before NPS is rejected, its merit must be assessed in the historical context. The National Pension System was notified on December 22, 2003, for all new recruits joining the Central Government service (except armed forces) from January 1, 2004. Later many states implemented it. After its introduction, the Central Civil Services (Pension) Rules, 1972 were amended. Accordingly, the benefits of OPS are not admissible to the Central government civil servants appointed on or after January 1, 2004. NPS is now regulated under the Pension Fund Regulatory & Development Authority (PFRDA) Act, 2013.
This PFRDA regulates NPS, subscribed by employees of the central government, state governments, and private organizations. It mandatorily replaced OPS for central government employees who joined the services on or after January 1, 2004.
The implementation was not a random exercise. It was done based on recommendations by experts. The Centre in 1999, commissioned a national project titled OASIS (acronym for old age social and income security) to examine policy related to old age income security in India. Based on the recommendations of the OASIS report, the Centre contemplated introducing a new Defined Contribution Pension System for the new entrants to Central and state government service, except to armed forces, replacing the existing system of Defined Benefit Pension System.
“The move was aimed to shift from the defined benefit pension scheme to defined contribution pension scheme. i.e., NPS in order to contain the rising and unsustainable pension bill. The transition thus resulted in the added benefit of freeing the limited resources of the government for more productive and socio-economic sectoral development,” a government official said. About 4% of the Central government budget already goes towards pensionary benefits alone and any further rise in this would not be sustained in the long run.
According to PFRDA, NPS is a defined contribution pension scheme. NPS enables an individual to undertake retirement planning while in employment. With systematic savings and investments, NPS facilitates accumulation of a pension corpus during their working life. NPS is designed to deliver a sustainable solution of having adequate retirement income at old age or upon superannuation.
Under NPS, returns are market-linked. It works under prudential guidelines and skills of the professional fund managers. To safeguard the interest of the subscribers against any possible erosion of the pension wealth in times of an economic downturn, the exposure of equity instruments have been limited to only 15% in the default scheme. Risk averse subscribers can also choose to invest their entire contribution (100%) in government bonds.
While NPS vs OPS will play out in the Himachal Assembly elections with AAP ruled Punjab considering following the same trend as Rajasthan, Chhattisgarh and Jharkhand, but the fiscal risks involved in transition of NPS borne employees to OPS regime are substantive and to a great extent unsustainable keeping in view the existing share of pensionary liability in government expenditure. It is estimated that the cost incurred by the government on pension is more than double the cost of NPS contribution in the long run. Scrapping NPS may be a nice political idea to grab political power but it is not an idea to be encouraged by political parties who aspire to rule on Raisina Hill in future.