Retracing steps on pension

Subir Roy
Senior Economic Analyst

IN the debate over the old versus new pension schemes, the point that tends to get overlooked is what should be the attributes of a good pension scheme. Instead, the debate is dominated by the issue of whether the old scheme being reintroduced by some states is affordable or not; that is, whether it will work against fiscal health. First, for the record, according to the latest annual Mercer CFA Institute Global Pension Index, Scandinavian and north European countries appear at the top with the best pension systems. The US comes far lower. India appears near the bottom, 41st among 44 countries.

The paramount issue with going back to the old scheme is that the pension bill of a small section of people will be picked up by the rest of the taxpayers.

How can India improve its rank? Both by increasing coverage and retaining fiscal health. The former can be done by introducing a minimum support for the poorest aged individuals. The latter can be done by increasing the pension commencement age as life expectancy increases, and reducing both household and government debt as a percentage of GDP.

The controversy has arisen because the Congress and AAP are promising to switch back to the old scheme. The Congress has already done so in Rajasthan and Chhattisgarh, and the AAP has said it will do the same in Punjab. Furthermore, both parties have promised a similar return to the old system in the campaign currently on in Gujarat.

The old scheme is so-called because it prevailed till end-2003, with a new one being introduced for those joining government service, Central as well as states, from January 1, 2004, onwards. The old one’s guiding feature was the promised or assured benefits to the retiree and thus was termed as the ‘defined benefit’ scheme. It assured a pension of 50 per cent of the last-drawn basic pay.

Along with the basic pay came dearness allowance (DA) which was periodically hiked for all serving employees and retirees. Thus a government employee’s pension was ‘index linked’ — linked to changes in the cost of living index. This was a key attraction of government service. If government employees tended to earn less than comparable corporate sector employees while in service, they were assured of a pension which was not only relatively handsome but also protected against inflation.

The problem with this system was that the government’s pension liability remained unfunded; that is, there was no corpus for pension payment which would keep growing. The annual budget estimated and allocated funds for the pension bill likely to have to be paid and was thus called a ‘pay as you go’ scheme.

This resulted in the pension bill rising systematically over the years and decades. In the 20-year period (1991-2021), the Centre’s pension bill jumped 58 times and the states’ 125 times. This was unsustainable. In 2020-21, the states’ pension outgo, as a percentage of their own tax revenue, ranged from 12% (Telangana) to 80% (Himachal Pradesh). If most of the tax revenue that a state raised went into paying pension to its retired employees, what was left for investment in developmental work?

The new scheme, which was started after considerable expert study for those joining government service from 2004, can be described as a ‘defined contribution’ system. Under it, an employee had to contribute 10% of his basic pay and DA and the government would match it. The government’s contribution was raised to 14% from 2019. This went into a corpus which is managed by pension fund managers sponsored by public sector banks and leading private sector financial institutions. They run different schemes depending on the risk preference of the contributor and the pension is paid out of this corpus, not general revenues.

Pension reform introduced by the Vajpayee government was bought into by the UPA government. Hence, reverting to the old scheme cannot be appreciated by those who shaped the UPA government’s economic policies. Montek Singh Ahluwalia, an iconic economic administrator of the UPA government, described the move to revert to the old scheme as ‘one of the biggest revdis (freebies) that are now being invented.’

The paramount issue with going back is that the pension bill of a small section of people will be picked up by the rest of the taxpayers who contribute majorly to the tax revenue of the government. As opposed to this, the new system allowed for pensions to be paid out of a corpus to which the employees themselves contributed in equal part as the government.

If this reversal is iniquitous, more so is the status of aged poor workers who are outside of the old or new schemes. It is ironic that what was originally conceived by experts for unorganised sector workers was adopted by the government for its own employees through the new scheme.

The Swavalamban scheme launched in 2010 sought to give a degree of financial security to old people in the unorganised sector and help build a corpus for them so that they could become financially secure post retirement. It was replaced by the Atal Pension Yojana in 2015 to build a universal social security system, especially for the poor, the underprivileged and workers in the unorganised sector. Subscribers would receive a guaranteed minimum pension ranging between Rs 1,000 and

Rs 5,000 on reaching 60.

This pension would be available after the subscriber’s death to his spouse. After the death of both, the corpus, as accumulated when the subscriber turned 60, would be returned to the nominee of the subscriber. If governments went broke seeking to give pension to the very poor among the workers, it would be one thing. Giving in to a minute section of the electorate, state government workers, who are already privileged in other ways, is a monstrosity.

If this is how far India has come, where gig workers can hardly consider themselves as workers as they cannot claim minimum wages, reasonable hours of work, overtime or leave, here is what is taking place in Singapore. It is expected to extend work injury insurance and pension coverage to over 70,000 food delivery and ride hailing workers from late 2024. However, they also will not be considered as full-time workers entitled to paid leave and other benefits. This is as reasonable as one can get and should engage the attention of India’s policymakers.