Pension or Tension?

by Dec 21, 2022Governance0 comments

A recent government notification by the Department of Pensions and Pensioner Welfare allows employees under the New Pension Scheme (NPS) to opt for benefits for self and their next of kin under the Old Pension Scheme (OPS) in case of disablement or death before their date of superannuation.

The announcement has taken the wind out of the sails of employee federations that highlight the difficulties and challenges faced by those under the NPS.

In addition to West Bengal, which never opted for the NPS, four states – Rajasthan, Punjab, Chhattisgarh, and Jharkhand – have taken the decision to revert to the Old Pension Scheme . And in Himachal Pradesh, many have attributed Congress’ win to the pre-poll promise the party made of returning to OPS. But how does this fare for states’ finances?

What is OPS?

Under the scheme, upon retirement, employees who had served for 10 years or more were eligible to receive 50 per cent of their last drawn basic pay plus dearness allowance or their average earnings in the last 10 months of service, whichever was more advantageous to them.

This was indeed a major incentive for government employment, for even the next of kin was eligible for the family pension. The main issue was that, given the increased life expectancy and the failure to build a corpus for pensions, it was becoming unsustainable for governments to meet their commitments from current revenues.

As of today, there are 48 lakh central government pensioners and 34.7 lakh employees. Although the projected outflow in FY23 on salaries (Rs 2.68 lakh crore) is higher than the outflow on pensions (Rs 2.07 crore) over the next five years, the figure is likely to be reversed.

In case of defence forces, the expenditure on the 3.5 lakh retirees takes up over 22 per cent of the defence budget of Rs 5.25 lakh crore. And 55,000 veterans are added every year to this list. This perhaps explains the government’s thrust on ‘Agniveers’ — the Army is leaner and younger, and in the long run, resources are freed up for R&D, defence acquisition, and military infrastructure.

Project OASIS and the NPS

To address this issue of ballooning pension bills, the government commissioned a national project, OASIS – an acronym for “old age social and income security” – in 1999 to examine policies related to old age income security in India.

Based on the recommendations of the OASIS report, the government introduced the NPS – it goes by the technical name ‘Defined Contribution Pension System’. This was for the new entrants to central or state government services, except the defence forces, replacing the existing system of the Defined Benefit Pension System, or the OPS as we know it.

On 23 August 2003, the Interim Pension Fund Regulatory & Development Authority (PFRDA) was established through an executive order to ‘promote old age income security’ by establishing, developing, and regulating pension funds. PFRDA also had the responsibility of protecting the interests of pension fund scheme subscribers and for matters connected with or incidental thereto.

The contributory pension system (NPS) was notified by the government on 1 January 2004 and all employees joining government services after 1 April 2004 were to be covered under this scheme.

For the record, it first saw the light of the day during the premiership of Atal Bihari Vajpayee of the National Democratic Alliance (NDA), and was continued by the United Progressive Alliance (UPA) government under Manmohan Singh. Currently, nearly 23 lakh employees have been covered under the NPS, which requires employees to contribute 10 per cent of their salary plus the dearness allowance (DA). This year, the government’s contribution is expected to be in the range of Rs 81,000 crore.

Addressing the NPS concerns

There were two main critiques of the NPS. The first, regarding death and disability, has already been addressed. The second concern was regarding the anticipated corpus that would be available to them at the end of their service span. Given the robust state of the economy, it is expected that the returns will certainly be much higher than the typical fixed deposit rates in the bank or the post office – financial instruments preferred by the normally risk-averse government employees.

In 2019, the Narendra Modi government also decided quite wisely to increase its contribution from 10 per cent to 14 per cent. This, coupled with the retirement benefits of gratuity and leave encashment, ensures that the employee will certainly not be left out in the cold even under the new pension regime.

The case of West Bengal and Punjab

In both West Bengal and Punjab [my karmabhoomi (workplace) and janmabhoomi (birthplace), respectively], the financial position is so precarious that state government employees (and pensioners, by implications) are not receiving dearness allowance at par with their colleagues in the central government.

In West Bengal, the gap in the DA is quite substantial – it is three per cent as opposed to 38 per cent for Central government employees. In Punjab, salaries have often been delayed, and district treasury officers are ‘informally advised’ on which bills to clear and which to be kept on hold.

Therefore, what matters is not just the intent, but also the fiscal ability to deliver. Thus, state governments must take a hard look at their current and projected revenue receipts before burdening future generations with commitments that will eat up resources for health, education, and infrastructure.

It makes most sense for state governments to emulate the concession given by the Union government for the next of kin of employees. But they must desist from populist steps like the restoration of the OPS, which will further jeopardise their fiscal stability. States’ ability to mop up resources is certainly much less than that of the central government. They must remember that their actions impact the fate of 1.32 crore employees – three times the number of those working for the central government.

We must all remember that getting parties to agree to a long-term vision of fiscal stability is far more difficult than breaking an agreement for short-term gains in elections. The NPS was a fine example of consensus among both the NDA and the UPA, and one hopes that better sense will prevail. Let future generations not be buried under debt in order to fulfil commitments made for an electoral gain.

(Sanjeev Chopra is a former IAS officer and Festival Director of Valley of Words. Till recently, he was the Director of the Lal Bahadur Shastri National Academy of Administration)

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