The Old Pension Scheme (OPS) will ruin the finances of state governments in the long run if it is brought back in a frenzy of populism. It will also punish the less privileged majority while pampering a minority.
Bad ideas have an uncanny way of gaining popular traction. This becomes even more relevant when the quest for votes leads political parties to embrace populism as their key electoral strategy. At the end of the day, the voter is hoodwinked and pays a heavy price in the long run. Nothing illustrates this better than the frenzied demands as well as promises to bring back the Old Pension Scheme. This was a key electoral plank for the Congress in Himachal Pradesh, and it won. The Congress government in nearby Rajasthan has already announced it. The AAP government in Punjab, the champion of populist schemes too, is talking about restoring the OPS. Tens of thousands of government employees of Haryana demonstrated recently in Chandigarh demanding the same. Of course, the Congress has promised the return of OPS if it comes to power in Karnataka, which seems more than likely at the moment.
Before analysing why this spells fiscal disaster, let's briefly look at the facts.
Under the OPS, all government employees were guaranteed a pension amounting to 50% of their basic salary upon retirement for life. A stage arrived when economists realised that just pensions would gobble up the budgets of most state governments as well as the central government. So the National Pension Scheme (NPS) was launched where a government employee has to contribute to his/her pension kitty. Almost everyone hailed the move. Suddenly, after the Lok Sabha elections of 2019, the ghost of the OPS has been resurrected. Assuming the Congress wins Karnataka and the OPS promise is cited as a major factor, how long can the BJP resist the temptation to adopt competitive populism?
Any policy measure needs to be measured on two counts: Is it fiscally sustainable? Two, is it morally sound? On both counts, the OPS comes a cropper.
It is not a secret that the finances of many state governments are in a perilous situation in the aftermath of the Covid pandemic. In many states, the fiscal deficit is already way above the 3% of state GSDP mark which is a kind of red line. No matter how buoyant GST and other tax revenues are, state governments will simply have not enough money to spend on even existing welfare schemes. Bringing back the OPS will lead to a massive increase in government expenditure. With no fresh revenues, they will need to borrow money to finance ballooning deficits. When any entity, an individual, a family or a state keeps borrowing to finance unsustainable expenditures, the result is invariably fiscal disaster. Sri Lanka and Pakistan are classic examples in recent times of the perils of untrammelled borrowings.
According to a report of the Reserve Bank of India (RBI), ten Indian states -- Andhra Pradesh, Punjab, Rajasthan, Kerala, West Bengal, Bihar, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana -- are already saddled with dangerous levels of debt. For instance, states like Haryana, Punjab, Tamil Nadu and West Bengal spend more than 20% of their annual budgets on interest payments. The return of OPS will mean salaries, pensions and interest payments will account for most of the budget, leaving virtually nothing for development and capital expenditure on infrastructure. It is precisely this that prompted the central government to implement the Agniveer scheme for the Indian armed forces where pensions are still guaranteed.In the latest budget, the allocation for "defence" was about Rs 5.90 lakh crores. Of this, Rs 1.38 lakh crores was allotted for pensions and an equivalent amount for salaries. The Agniveer scheme will lead to a drastic fall in pension outlays in the long run for the armed forces.
Clearly, the OPS is fiscally unsustainable. But is it morally justified as a "social good"? Not by a long shot.
The lowest salary at entry level for a government job as stipulated by the Seventh Pay Commission is Rs 18,000 per month. Add dearness allowance linked to inflation and the monthly income becomes close to Rs 30,000 per month. Upon retirement, Class IV employees can expect a pension of at least Rs 35,000 to Rs 40,000 per month; which will keep rising as DA is added twice every year. Class I employees get a pension of about Rs 1,25,000 lakh to Rs 1,50,000 per month.
There is another killer twist.
Life expectancy has shot up officially to about 71 years of age. But most government pensioners now live up to the late 70s and their spouses live longer. In effect, the state, under the OPS has to give pensions for 20 to 30 years.
By any yardstick, these pensioners are not living below the poverty line. In fact, their pensions are far higher than the per capita income of India. More importantly, they are a pampered minority. The total number of government employees in India would range from 25 million to 30 million. The total labour force in India is about 550 million. How is it morally justified to keep pampering a small minority at the cost of the vast majority of Indians?
That said, when bad ideas take root, common sense and morality go for a toss.
Sutanu Guru is Executive Director, C Voter Foundation