Pension load high, experts call for overhaul

Say exhaustive restructuring of pension system, including rethink on ‘unsustainable’ statutory pensions, is required
Pension load high, experts call for overhaul

KOCHI: As the state’s pension burden balloons, leading economists have called for an exhaustive restructuring of the entire pension system, including a rethink on statutory pensions which they term unsustainable. Though statutory pensions were discontinued in 2013 for fresh recruits, and a contributory pension system introduced, the change provides little relief to the state finances, said Jose Sebastian, a public finance expert who has studied the matter in-depth.

“Those coming under statutory pension will retire only in 2042. Assuming that they live for another 30 years, the statutory pension will continue till 2072, and in some cases, even 2080,” he pointed out.
The statutory pensions were introduced at a time when life expectancy was 32 years, in 1952, Sebastian said.

“Now it is 70 years.” As part of the restructuring, he demanded that all statutory pensions be brought under the contributory pension system. Kerala currently has 5.25 lakh government service pensioners. While the welfare pension in the state is just Rs 1,600 per month, the average pension of the service pensioners is as high as Rs 36,676.16.

illus | express
illus | express

Sebastian said the National Pensions System (NPS) Act has enabling provisions to bring statutory pensions under NPS if circumstances warrant. His calculations show that the contributory pension of each statutory pensioner can be notionally worked out. As per this calculation, the pension burden of the state will be just one-third of what it is now.

“It is possible to release Rs 16,945.25 crore this year, which can be used to raise the welfare pension to Rs 4,300 without any additional resource mop-up. This is sufficient for a dramatic turnaround of Kerala’s economy and finances,” he argued. Economist M A Oommen said in a state like Kerala where life expectancy is very high, the burden is too high to bear, given that the pension is 50% of the last drawn salary. He pointed out that when he was a member of the 5th Pay Commission, in 1987, the panel had warned that the state’s pension outgo was a sizeable portion, and it was a deep-seated liability on the exchequer.

“It is not just a political issue, it is also a question of social justice. The current system is extremely unsustainable and illogical,” Oommen said. K P Kannan, development economist and former director of the Centre for Development Studies, Thiruvananthapuram, however, reckoned that there is no crisis at the moment for the state government. “But it could lead to a crisis along with other issues, such as the interest burden on its borrowing and its salary outgo,” he said.

Consider this: At the moment, 20% of the state’s revenue goes towards pensions, another 20% goes towards interest payment on its borrowing, and 34% towards salary outgo. This means, 74% of the state’s revenues are absorbed by the three segments. According to Kannan, a solution to this imminent crisis is to raise the retirement age of government employees to 60. “The retirement age of 56 years is quite low. Given the longevity of the people, the state would end up paying a pension for 30 years, which could exceed the number of years in service,” he said.

Though the youth organisations may protest, the fact is that government recruitment will not solve the state’s unemployment issue. “Only 15,000 government employees retire per year. By raising the retirement age to 60, the government’s pension outgo will stabilise for four years,” he said. The increase in retirement age would also help the government use the expertise and the experience of its staff when they are at the peak of their abilities.

“While both the LDF and the UDF talk about social reform, they haven’t been able to do even a proper administrative reform. That has led to a stagnant political culture in the state,” Kannan said. Sebastian pointed out that a significant portion of the service pension is parked in bank deposits, mutual funds, and the stock markets. “The state has landed up in a situation where government employees, who received a salary for 30 years, are given half of the last drawn salary and dearness allowance with an upward revision once every five years for another 30 or even 40 years,” he said.

Where Kerala stands

Statutory pensions were discontinued in 2013 for fresh recruits, and a contributory pension system introduced. However, the change does not provide a huge relief to the state’s finances

Those coming under statutory pension will retire only in 2042. Assuming that they live another 30 years, statutory pension will go on till 2072, and in some cases, even 2080.

State has 5.25L government service pensioners. While the welfare pension is just Rs 1,600 per month, average pension of service pensioners is as high as Rs 36,676.16.

20% each of state’s revenue goes towards pensions and interest payment on borrowing, and 34% towards salary outgo. Meaning. the three segments absorb 74% of its revenue.

A significant portion of the service pension is parked in bank deposits, mutual funds, and
stock markets

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