Synopsis
The new Congress election manifesto makes no mention of OPS. Answering questions, P Chidambaram said OPS was very much on the party’s mind, but it was waiting to react to the report of an official committee on the issue. Does that suggest second thoughts?
One of the worst ideas of Congress has been abolition of the National Pension System (NPS) and return to the old pension scheme (OPS) in the three states of Rajasthan, Chhattisgarh and Himachal Pradesh, where it came to power. Its newer state government in Karnataka is considering the same step, but has yet to take it. Is better sense prevailing?
The new Congress election manifesto makes no mention of OPS. Answering questions, P Chidambaram said OPS was very much on the party’s mind, but it was waiting to react to the report of an official committee on the issue. Does that suggest second thoughts?
In Jharkhand, the coalition government of which Congress is a part has gone back to OPS. Seeing the populist trend, even some BJP leaders in other states have said OPS needs reconsideration. Sorry, it doesn’t.
A recent RBI study found that a shift to OPS from 2023 onward would provide a small, temporary relief to state governments. But the additional pension burden would soon mount and eventually cost a spectacular 450% of the NPS burden. There cannot be a stronger indictment of such a short-sighted policy.
Reversion of Congress to OPS was denounced in 2022 by none other than Montek Singh Ahluwalia, the party’s former deputy chairman of Planning Commission. He declared, ‘Bringing back the old pension scheme is one of the biggest ‘revdis’ (populist giveaways) that are now being invented.’
Manmohan Singh, Congress PM from 2004 to 2014, had also castigated OPS as a fiscal millstone. During his term, he had ushered in NPS, and boasted about it as a major fiscal reform whose wisdom would be recognised by future generations.
So, two of the greatest economists ever to grace Congress had denounced OPS and hailed NPS as a great reform. Did any economic study persuade Rahul and Sonia Gandhi otherwise? No, their move to reinstate OPS was a desperate search for new freebies to win votes and seem different from BJP.
Under OPS, central and state government employees got a fixed pension of 50% of last-drawn basic pay, indexed to inflation. Globally, such a ‘defined pension’ turned out to be a fiscal burden that pre-empted a rising share of government revenues at the expense of other urgent needs. So, countries’ abandonment of economic sense across the globe shifted to a pension based on ‘defined contributions’.
NPS aimed to do the same. It applied to those joining government service from the start of 2004. Their defined contribution was 10% of basic salary and dearness allowance (DA), with a matching government contribution (later raised to 14%). By investing part of this contribution in stock markets, NPS aimed to ensure a good pension for retiring employees, even while reducing the budgetary burden.
But government employees always resented the deduction of 10% of salary towards NPS. They wanted a return to OPS under which they made no contribution at all. They sought to benefit at the cost of posterity. Their attitude was that of Groucho Marx who famously said, ‘Why should I worry about posterity? What did posterity ever do for me?’
In 1990-91, the Centre’s pension bill was ₹3,272 cr, and the states’ bill was ₹3,131 cr. By 2020-21, the Centre’s bill had jumped 58 times to ₹1,90,886 cr, and the states’ bill 125 times to ₹3,86,001 cr. NPS aimed to end this march towards fiscal suicide.
In technical parlance, OPS was unfunded. No corpus of funds was created to ensure a stream of income that would suffice to pay future pensions. OPS was a ‘pay as you go’ system where current taxpayers would continually finance the pensions of retirees.
This system was sustainable as long as there were plenty of youngsters to replace retiring pensioners. But the world over, fertility rates have fallen below replacement rate. And, so, future generations will be fewer in number than those retiring. In such circumstances, defined pensions will place an intolerable burden on young taxpayers. In some cases, the pension bill will exceed the government’s entire salary bill.
So, countries across the globe have been shifting from a defined pension to a defined pension contribution into a fund. This fund is invested in government bonds and equities to generate a stream of income that finances future pensions. That is the aim of NPS. It ensures that rising pensions will not create intolerable fiscal burdens in the long run.
Alas, Rahul Gandhi jumped on to the bandwagon of government employees to gain votes. This was short-term opportunism and absence of serious thinking.
Did the return to OPS, effectively a freebie to government employees, ensure victory for Congress in the state elections in Rajasthan and Chhattisgarh in December 2023? No. The party was thrashed in both states. It was one more demonstration of the electoral lesson that while competition in freebies may be part of electoral politics, they are no substitutes for innovative ideas and performance. Congress needs to absorb that lesson.
This article was originally published by The Economic Times on April 9, 2024.
