Why Old Pension Scheme is bad politics, bad economics
The New Pension Scheme (NPS) – it was first implemented by the Centre in 2004 and 27 states have shifted to it since then – does not even come close in terms of future earnings to the OPS.
More and more opposition parties in India seem to be warming to the idea of reverting to the Old Pension Scheme (OPS). There is no denying that such a promise will appeal to current and future government employees. The OPS offers guaranteed, inflation- and pay commission-indexed pension payments to retired government employees and their spouses (after the employees’ death) without any contribution from the employees. The New Pension Scheme (NPS) – it was first implemented by the Centre in 2004 and 27 states have shifted to it since then – does not even come close in terms of future earnings to the OPS. The NPS corpus is built by employee contributions – to be sure, the government also makes a contribution – and returns are market-based rather than a fixed proportion (subject to upward indexation) of the income level at the time of retirement.
If the OPS was so much better for the employees, why did the Centre and most states shift to NPS? The one-line answer is that everything which is attractive is not affordable.
Are political parties who are promising a return to the OPS justified in doing this? An HT analysis suggests that this is both bad politics and economics. The former because its political appeal is very limited — it benefits a very small constituency when it comes to deciding an election — and the latter because it has the potential of making state finances completely unsustainable. Here are four charts which explain this in detail.
OPS’ economic burden has been increasing on states
Because NPS was not implemented in a retrospective manner, almost all of the current pension burden on states is on account of OPS commitments. NPS is for employees who joined a government job in 2004 or after that retire from service. If one is to assume that the average age of these employees at the time of joining was 30, then the first cohort of NPS retirees will be generated in 2034 (assuming a retirement age of 60).
Data from the Centre for Monitoring Indian Economy (CMIE) shows that the share of pension spending in states’ own revenue has been increasing steadily. It was less than 10% at the beginning of the reform period and had increased to more than 25% by 2020-21. To be sure, the pension burden varies across states. A March research note by Soumya Kanti Ghosh, the chief economist of SBI had highlighted this fact. Clearly, both the Centre and states expect this burden to come down once NPS cohorts begin to retire. The trend will be the opposite if states start reverting to the OPS. This will further vitiate what is already an unsustainable fiscal situation.
Can OPS win elections? SP led in postal ballots in Uttar Pradesh but …
The Uttar Pradesh election held this year is a good example for seeing that the bad economics described above does not even pay electoral dividends. The Samajwadi Party (SP) promised a return to the OPS in the election and was rewarded for it by government employees. If one were to just count postal ballots – government employees on election duty use this method to vote – SP would have won 71.5% of assembly constituencies (ACs) with a 45% vote share, compared to 22.3% ACs and 32% votes of the BJP. However, as is known, it was the Bharatiya Janata Party (BJP) that won a big majority – 67.7% ACs with a 43.8% vote share – in Uttar Pradesh and not the SP. In fact, even if the SP had won all postal ballots, it would just be a drop in the ocean. Postal ballots were not even half a percent (0.48%) of the total votes polled.
The bigger crisis with government jobs is growing informality not the NPS
To be sure, it is not the case that only those with a job vote in an election. People with government jobs who are potential beneficiaries of states reverting to the OPS can also influence the voting choices of their family and friends. However, such people are a vanishing tribe. Data from the Periodic Labour Force Survey (PLFS) and its predecessor – the Employment and Unemployment Survey (EUS) – shows growing informality even in government jobs. In 2004-05, 23% of regular wage government employees did not have any written contract, which increased to 35% in 2019-20. These trends are also reflected in the share of such workers who don’t have any social security benefits. If opposition parties promised to fix this problem, they might attract even those in private jobs, as informal jobs are an even bigger problem there. Spending time and energy on championing OPS, on the other hand, is tantamount to targeting a really small subset of voters. In fact, one could go further and argue that because the OPS burden is bound to divert resources from other necessary heads, it could put off more voters than it will bring.