6 min readMar 10, 2023 02:22 PM IST
First published on: Mar 10, 2023 at 07:23 AM IST
Most governments, regardless of their ideology, implement policies that redistribute wealth from the rich to the poor in varying degrees. It is in this regard that I find the recent proposals in favour of the return to the Old Pension System (OPS) the most puzzling.
For the uninitiated, the OPS is a “pay-as-you-go” scheme where the contributions of current government employees are used to fund the pension liabilities of past government employees. In contrast, the New Pension Scheme, or the National Pension System (NPS) — established by the NDA government in 2003 — is a defined contribution scheme where the employees invest a certain fraction of their salary that is complemented by a contribution from the government. In OPS, the employees are guaranteed an amount equivalent to 50 per cent of their last salary in perpetuity.
It is not difficult to imagine the vastly different fiscal implications the two policies entail. With rising lifespans, the only way the OPS can be made sustainable is by either having more government employees — and therefore its associated inefficiencies — or by progressively borrowing more.
How this will play out is obvious. States’ finances will be crippled under the pension burden. A recently released report by the Reserve Bank of India on states’ finances (November 19, 2022) provides a detailed breakdown of states’ expenditures on pensions. In Rajasthan, which moved to OPS the earliest, the state’s expenditure on pensions as a percentage of its own tax revenues is a whopping 28 per cent. In contrast, for example, in Maharashtra, the same percentage is 14 per cent, while in Gujarat it is 15 per cent.
Eventually, when the states hit the borrowing constraints, they will end up having to cut down on expenses. Expenses on health, education, and other long-term assets will naturally be the first ones to go. The losers will be the majority of poor people who will be denied basic services and support from the state. The winners will be the minority of wealthy government employees.
None of this is rocket science. Several economists across the party lines have criticised OPS for its fiscal implications. However, while future obligations of this disastrous proposal indeed need to be flagged, the immorality of this proposal is more important to highlight.
This is a rare example of a policy that explicitly takes away the wealth of the poor to distribute it to the rich. Supporters of the OPS might cite the recent corporate tax cuts as a counterexample. However, corporate tax cuts have at least an in-principle rationale of spurring corporate investment contributing to even larger tax collections and employment. Whether or not this actually happens is an empirical question where the evidence is mixed. But can one argue with a straight face that paying more pension to an ostensibly wealthy class of retired government employees would spur similar economic activity justifying these benefits? More importantly, of course, cash transfers to any class would increase their consumption. Would we, then, be okay if the government were to stop a scheme like Ayushmann Bharat and use the proceeds to pay cash to some of the richest people in the country?
Make no mistake, the retiring government employees are amongst the top 5 per cent of income earners in India. Finally, the sixth and the seventh pay commissions revised the salaries of government employees upwards assuming that they would be under NPS. Therefore, any switch to OPS now is a breach of trust of all citizens.
That brings me to my second point: Why are some political parties so openly advocating for benefits to rich government employees while denying the poor their right to a better material life? Since this is an obviously terrible economic policy, this proposal must make political sense. But given that government employees are a small minority, how can it make political sense? I can think of two explanations. One benign, and one disturbing.
The benign explanation is that freebies are not mutually exclusive. Parties desperate to win elections are promising everything to everyone. In the short run, they may even fulfil their promise. Finally, when the chickens come home to roost, they will cut down on expenditures such as defence, healthcare, etc, to finance these profligacies. If the current dispensation at the Centre is re-elected, opposition parties will inherit an even better fiscal situation when they eventually come back to power in states and the Centre. The other benign explanation is sheer error: Parties have simply miscalculated the political costs and benefits of OPS, and even if these parties win some upcoming elections, OPS will not be a major factor behind their victories.
The disturbing explanation is that the Opposition has realised that the main obstacle it faces in its quest for power at the Centre is the last-mile delivery of welfare schemes like Jal Se Nal, Ujjwala, etc. The success of these schemes eventually rests on the ability of the lowest layer of government employees to deliver these schemes. OPS could simply be bait for government employees to sabotage these welfare schemes. Do I think this to be most likely? Probably not. Do I think it is impossible? Certainly not.
People can draw their own judgement on the likelihood of these or other reasons. But the party that has ruled over the country for decades despite its economic performance is unlikely to bet on a policy that so obviously favours the rich against the poor unless it sees clear electoral benefits.
The writer is a lecturer in Economics at the University of Essex, UK
The OPS is a “pay-as-you-go” scheme where the contributions of current government employees are used to fund the pension liabilities of past government employees. 
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