The increase in life expectancy and rise in the cost of living further reinforces the need for assured monthly income for a decent life in old age
Stung by the Opposition States, including Rajasthan, Chhattisgarh, Jharkhand, Himachal Pradesh and Punjab reverting to the old pension system (OPS) and these parties promising the same in the impending state elections as also in Lok Sabha elections next year, the Union government is considering to amend the national pension scheme (NPS) to ensure that its benefits to the employees covered under it are more or less at par with the OPS. This will be at the cost of sacrificing fiscal prudence.
The pension provides a person with a monthly income when he is old and hence not productive enough to be able to earn. The increase in life expectancy and rise in the cost of living further reinforce the need for assured monthly income for a decent life in old age.
Under the OPS, retired employees received 50 per cent of their last drawn salary as a monthly pension. As of date, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500 Just as the government offers its employees an adjustment in dearness allowance or DA to offset the increase in the cost of living, the monthly payouts of pensioners also increase to provide for DA.
A government employee under OPS could not have got anything better. He was entitled to a decent ‘pre-determined’ monthly amount; the pension was fully protected against inflation and got it as long as he lived. After death, his wife gets the same amount for seven years and thereafter the family pension is around 60 per cent of this amount till she is alive. However, from the perspective of the government, the arrangement could not have been worse.
Given the architecture of the scheme, there was an inherent tendency for pension liabilities to balloon due to the addition to the pensioners’ club every year, higher salaries of those joining, inflation indexation, increased longevity and so on. The proof of the pudding is in the eating. In 1990-91, the Centre’s pension bill was Rs 3,272 crore. By 2020-21, it had jumped 58 times to Rs 190,886 crore (for 2023-24, this is Rs 234,000 crore). For all states, it shot up 125 times from Rs 3,131 crore in 1990-91 to Rs 386,001 crore in 2020-21.
Overall, pension payments by states account for a quarter of their tax revenues. For some states, these took away a much higher share of their tax revenue. For Himachal Pradesh, it was 80 percent whereas for Punjab and Rajasthan, it was 35 percent and 30 percent respectively.
Financial prudence requires that every year, the government set aside capital which together with return accruing thereon would create a growing corpus sufficient to pay for the pension liabilities on a sustainable basis thus avoiding any stress on the budget. But, that was never done. Instead, both the Centre and states have followed what in jargon is known as ‘pay-as-you-go’. This has made the present generation of taxpayers bear the continuously rising burden of pensioners. The ball doesn’t stop here. Given the persistent shortfall in tax revenue, they were forced to borrow more and more thereby passing on the burden to future generations of taxpayers as well.
Unlike OPS where the employee doesn’t contribute anything, NPS (this was introduced for government employees joining service from January 1, 2004) is a contributory pension scheme under which employees contribute 10 per cent of their salary (Basic + Dearness Allowance). The government also contributes 14 per cent towards the employees’ NPS accounts. The money is invested in multiple investment avenues i.e. equity, corporate debt, government bonds and alternative investment funds (AIFs) where it grows into a sizeable corpus by the time an employee reaches retirement age.
On retirement, she is allowed to withdraw 60 per cent of the corpus (this is tax-free), and buy an annuity from the remaining 40 per cent. This annuity is known as a pension. NPS offers a self-financing and fully funded arrangement for discharging pension liabilities in which the state knows for certain ‘how much it has to contribute’. There won’t be any major stress on the budget even as the employee gets a good pension depending on the amount of contribution made, the age of joining, the type of investment, and the income accruing from that investment.
Under this scheme, the pensioner enjoys a lot of flexibility; he can increase the pension amount by asking his fund manager to invest in say a ‘growth fund’ wherein 50 per cent of the corpus can be put in equity which is capable of generating better returns than investment in corporate bonds or government securities.
If the Centre and all states were to continue with NPS, post – 2034, employees who joined service after January 1, 2004 (assuming an average service period of 30 years) wouldn’t be needing any budget support for their pension liabilities. But, five aforementioned states that have gone back to the OPS even for such employees plus other states where opposition parties promising its restoration win, will face monumental increases in stress on their budget.
In the interregnum, these states face an additional dilemma. This has to do with the corpus already built out of contributions made under NPS in the employees’ accounts. Having decided to give pension under OPS, it would be unfair to allow that corpus (albeit under NPS) to be used for her benefit. On the other hand, taking away that money to pay pension under OPS will face legal hurdles. But, opposition parties are least bothered.
Their sole obsession is with garnering votes. They are sure to succeed in their game plan all the more because under that scheme, employees get a minimum of 50 per cent of their last salary drawn and that too without having to make any contribution. These parties need not also bother about its impact on the budget as this will arise only after 2034 when they won’t be around to face the music.
Modi - government wants to remain glued to NPS, this being a progressive scheme. But, it faces a real threat on the political front. So, it wants to modify NPS in a way such that it could match the benefits under OPS. It is mooting changes in “actuarial calculations” to offer higher returns, as well as changes in the share of contributions made by the employee and the government. With these changes, it hopes to ensure at least 40-45 per cent of its last-drawn salary as a retirement payout. This won’t satisfy employees who have been promised Moon by opposition parties.
Modi - government seems to be sailing in two boats at the same time. It says it doesn’t want to fiddle with the core of NPS where returns are market-determined. Yet, it wants to interfere to match the pension amount guaranteed under OPS. Any such attempt will seriously undermine the finances of the state and yet there is no certainty that it will get any political mileage.
To conclude, neither OPS nor any major interference in NPS is desirable. Team Modi should continue with the status quo. However, it should create mass awareness of the pitfalls of OPS. The government employees also need to understand that the vast majority of workers in the unorganised sector don’t get any social security coverage. Scarce resources should be deployed to help them.
(The writer is a policy analyst, views are personal)
