One must never underestimate the power of bad ideas. They must be refuted repeatedly. One such idea that is rearing its malevolent head is the move by select states to jettison the National Pension Scheme (NPS) and revert to the Old Pension Scheme (OPS) for government employees.
Introduced by the Atal Bihari Vajpayee government in 2003, and effectively implemented by the UPA government, all but a few states had enrolled for the NPS by 2007. NPS was a farsighted policy intervention as the expert committee set up to study pension liabilities had warned, in 2003, of the continued risk of the then existing pension system. It pointed out that the pension payout of states had risen from 2.1 per cent of total revenue receipts in 1980-81 to 11 per cent by 2001-02 and were projected to hit 20 per cent by 2020-21.
In 2005, the then UPA government said that this was an apt time for India “to be starting a system of pension reforms”, given its relatively young working population. Soon after Prime Minister Manmohan Singh and Finance Minister P Chidambaram impressed upon the states the implications of pension on government finances and exhorted them to sign up for the NPS.
However, in the last few months, Congress-run Rajasthan and Chhattisgarh and AAP-run Punjab have reverted to the OPS while Jharkhand has announced plans to do so. Turning the clock back on this reform is bad politics, and undeniably bad economics.
While the AAP is living up to its reputation of unbridled populism and fiscal profligacy, the Congress has seen internal divisions – many have questioned the wisdom of these moves given that in the 2014 general election it claimed pension reform as one of its key achievements. Montek Singh Ahluwalia, the Deputy Chairman of the erstwhile Planning Commission, has also been critical of this move towards the OPS. Maybe Chidambaram should lend his wisdom to the Congress.
This return to the old system will bring very limited financial gains in the short term to the state governments — they can skip the 14 per cent contribution towards employee pension funds. The states have demanded that the funds accumulated in the NPS be given to them, which is not legally tenable: As per the PFRDA, these funds belong to employees.
The primary reason for exiting the OPS was its sustainability. The Union budget provided for pensions every year but that catered to the current year’s expenses, and future liability remained unfunded. The pension liability will keep rising and with rising benefits — salary and dearness allowance — increased longevity and better healthcare leading to higher life expectancy, there seems to be no visible source for funds to cater to this.
Rajasthan was one of the first few states to adopt the NPS and it is also the first state to revert to the OPS. The pension bill for Himachal Pradesh is more than 79.93 per cent of its own tax revenues, for Bihar it is 58.9 per cent, Punjab 34.24 per cent, Rajasthan 30.38 per cent and Chhattisgarh 24.19 per cent. In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and for all states put together it was Rs 3,131 crore. By 2020-21, the Centre’s pension obligations had jumped 58 times to Rs 1,90,886 crore; for states, it had jumped by 125 times to Rs 3,86,001 crore.
If other committed expenditure — salaries and interest payouts — is added to the pension liability, there will be little left for state governments from their own tax receipts. This will crowd out other important expenses such as that for poverty alleviation, infrastructure, or healthcare.
Clearly, states lack adequate finances to revert to the old pension scheme.
Because the pension payments under the OPS are done by the future generation, the principle of fairness between generations is violated. As India’s demographic profile gradually changes with declining fertility, increased longevity, ageing South versus young North the dependency ratio will remain flat before it starts rising again. These changes will make intergenerational inequity more stark.
It is sinful, unprincipled and quite unethical to create liabilities that don’t apply to your present government but will apply to a government in the future. As Arvind Panagariya put it, “the earliest liability will be in 2034. So your ‘sarkar’ is safe. You are really stranding the government which will be in power in 2034 and whoever will follow after 2034”.
The distribution of the state’s resources will also turn out to be unfair because a disproportionately large share of the state’s revenue will be allocated for the benefit of a miniscule number of government employees.
We must realise that the world has long moved away from defined benefits to market-linked benefits. Those who don’t will suffer financial crises of the kind suffered by countries like Brazil and Argentina. With its tax benefits, extremely low expense ratio and professional management, the NPS is a very good retirement product. With a solid track record of high returns, subscribers are building a very healthy retirement corpus. With the cap of 50 per cent exposure to equity, the excess returns per unit of risk are probably the best in class.
It is time that the government reaches out to the broader Opposition and builds some consensus with at least the principal opposition party, the Congress. It was not very long ago that both the parties (the Congress and BJP) were on the same page vis a vis pension reforms. Pension reforms are fundamentally important for the nation’s financial health. Additionally, if we don’t get our act together the SC will once again step into the shoes of the executive.
Therefore, let us celebrate the wise policy choices India has made through the implementation of the NPS and the creation of PFRDA.
The writer is Member of Parliament, Rajya Sabha and former deputy chief minister of Bihar