Old Pension Scheme | Future generations will pay for today’s myopic electoral politics

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Pension pains are not limited to ‘sarkari karamcharis’ (government employees). It is part of the changing realities of work life that have not left even private sector workers untouched. Over time, the nature of employer-employee contracts has changed; and it is for good reasons. Not just for saving the wage bill of organisations — be it public and private. The raging debate over the Old Pension Scheme (OPS) must be seen in this contemporary context.

In the old order, salaries were low, and the lifetime remuneration was back-ended, loaded in favour of retiral benefits. This was also necessitated by the absence of a social security ecosystem such as affordable medical insurance, annuity-based savings options, affordable housing loans that enabled employees to invest in property during their working life — instead of waiting for their superannuation package such as provident fund and gratuity. Or in investment opportunities — such as stock markets and mutual funds. Also average longevity has increased. With general improvement in healthcare, many are able to pursue a second career or job post-retirement.

This author used to work for a leading consumer goods company. Employees would joke that it may not be such a lucrative place to work in but a great organisation to die for or retire from. Because although the salaries were modest, the retiral benefits were great for them and the families to live comfortably in their old age.

However, everything evolves with time.

With economic liberalisation, and entry of large global players, salaries began to balloon in the nineties. Remuneration of company directors, which were earlier capped by government regulations were lifted. The cost to the company (CTC) of senior management who used to be paid in low six-digits (in rupees) escalated almost overnight to respectable eight digits (in rupees) as per trends in the job market. Consequently, pension payouts went up astronomically — as it was based on the last drawn salary. Although highly profitable, it found accumulations in designated pension funds inadequate for hefty liabilities. This led to a massive hit to the profits and balance sheets by way of ‘unfunded retiral benefits’. The company had no option but to change the pension scheme on similar lines as affected by the government in replacing the OPS with a new scheme.

Salaries in government jobs were not static during this period, and had increased substantially in terms of basic pay-scales and dearness allowance. The accruals for superannuation went up simultaneously as a function of salaries. There was a parallel development in the financial sector.

With insurance sector reforms many private pension funds came into play. Relaxation in foreign direct investments (FDI) norms provided a boost to the stock markets. Professional pension fund managers were expected to avail of these financial market reforms to generate better returns for pensioners. What happened was inevitable, and just a matter of time because the old system was not sustainable.

The arguments put forth by several leading economists, on both sides of the political fence, are worth recalling. Last month, Montek Singh Ahluwalia, who was Deputy Chairman of the Planning Commission during the earlier United Progressive Alliance (UPA) regime of Prime Minister Manmohan Singh, called it the “biggest revadi”, borrowing a term used by Prime Minister Narendra Modi describing ‘freebies’ offered by political parties. He has suggested that such largesse can jeopardise the macro stability of the economy. Arvind Panagariya, former Vice Chairman of the NITI Aayog, has called making such proposals as part of election promises as “sinful” and “immoral”.

“The burden of the pension will shift to governments that come after 2034. Future generations will have to pay for government employees.” Praveen Chakravarti, Head of Data Analytics Cell, pointed to the innate inequity of such a proposal citing promises made by political parties during the recent assembly elections in Gujarat and Himachal Pradesh. He asked in a twitter post, ‘Why should the top 0.5% of people get 15% of all taxpayers’ money as post-retirement pension?’

The Congress’ win in the Himachal Pradesh assembly elections, where, in its election manifesto, it promised to return to the OPS, has opened a political pandora’s box. Panagariya has warned, “the burden of the pension will shift to governments that come after 2034. Future generations will have to pay for government employees”. He said “this is risky and irresponsible. It is unconscionable for any political party to make such offers”.

Other opinion leaders and policy-makers have also spoken up. But, political parties being what they are, that is bound to become a poll plank in coming state selections of Karnataka, Chhattisgarh, Rajasthan, and Madhya Pradesh. Another downside of reverting to the OPS is it will keep the younger generation dependent on government jobs that come with a ‘lifetime’ guarantee, rather than seek more professionally value-adding opportunities that will lead to capacity building which will make India more competitive in the emerging global economic order.

The answer, therefore, lies in constructive dialogue — by building public opinion that will make political parties engaged in competitive populism see sense, and not push India towards a fiscal disaster for compulsions of electoral politics with ‘eyes wide shut’.