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How old can be gold

Political opposition to pension reform is illogical, anti-poor and ignores the fact now is the best time to change

india Updated: Jan 22, 2006 23:40 IST
Saubhik Chakrabarti
Saubhik Chakrabarti

One of our greatest political economic ironies has been that post-World War II the "capitalist" West instituted universal social security schemes while "socialist" India decided to take care of only the privileged. Provident funds, pension schemes, gratuity payments, all these benefit only the public sector and the organised private sector.

Now that the socialist tag has lost a bit of its mystique, we are faced with a second irony. This government and the previous one have tried to reform the pension system for government employees, on the logic that the money saved for a resource-scarce treasury can be spent on the poor. And, equally important, that a reformed system can give low-income earners a chance to save for their old age. Can you profess faith in the politics of egalitarianism and still oppose this change? Ironically, you can, as the Left has demonstrated, effectively holding up the pension Bill, which should have been passed by now.

This study by HT Research answers first why a reform in the Central and state government pension schemes is necessary. The Centre is spending 11 to 12 per cent of its net tax revenue on pension commitments. States are spending nearly 15 per cent. And remember this huge amount of money is only for ex-government employees. In 2000, they numbered 38 lakh. The total number of Indians above 60 that year was 404 lakh.

Pension reform tries to address this absurdity. It also recognises that now is the best time for it, as we argue in the second section. India, unlike the West, will have a large proportion of population entering the workforce over the next two decades. The West is already in a social security crisis because of ageing population. As our figures show, India's dependency ratio - percentage of persons below 15 and over 65 will go down from 62.5 now to 46.1 by 2025. But by 2050, the figure will be 52. A new pension system now, that will be inevitably improved and expanded over time, is therefore the smartest solution.

As smart is the underlying principle of the New Pension System (NPS), the focus of the next two sections. NPS works on giving employees the freedom to plan their retirement. Government employees, and when NPS is extended to other sectors, all working Indians, can choose whether to put their money in the hands of a private fund manager or opt for a de fault scheme where their money will be managed by a public sector fund manager. To lower transaction costs - these can eat up net returns - bank branches and post offices will work as "points of presence" to collect the money. A lot of safeguards and regulatory checks have been built in, as our analysis of the NPS shows.

So, what's the Left's problem, apart from irrelevant quibbles about 26 per cent FDI limits on private sector pension fund managers? Marxists say look at Chile. The Chilean privatisation of pensions has not been a success because it replaced a state-funded, near-universal pension system with a privately managed scheme. India's current pension system covers only 10 per cent of its working population. So, the comparison is faulty. Second, the Chilean reform was marred by high management fees, up to 33 per cent of cumulative contributions. That need not happen in India - we can learn from their mistakes.

The biggest mistake we will make is to do nothing. There's a chance, for the first time, for India's poorer working population to have access to a social security system. Will we, again, let go of that remarkable opportunity in the name of socialism?

First Published: Nov 16, 2005 19:36 IST