Fund-mentally disastrous: Why a return to Old Pension Scheme is a giant freebie

Please rethink your demand to abolish the National Pension System (NPS), the great reform that your own party enacted in 2013. Your party has brought back the old pension scheme (OPS) in Rajasthan and Chhattisgarh, two states where it rules, and you have promised the same nationally.

Dear Rahul Gandhi,

Your padyatra has the potential to rejuvenate a once-great party. But it must be supplemented by good policies. You think, mistakenly, that you can get reelected by promising evermore freebies and giveaways. That recipe has failed repeatedly in the past. If Congress does get reelected, it will be for other reasons, and your freebie promises will then become a fiscal albatross.

Please rethink your demand to abolish the National Pension System (NPS), the great reform that your own party enacted in 2013. Your party has brought back the old pension scheme (OPS) in Rajasthan and Chhattisgarh, two states where it rules, and you have promised the same nationally.

Leave Behind Ye Olde
This has been denounced by none other than Montek Singh Ahluwalia, erstwhile deputy chairman of the Planning Commission when your party was in power. He said last week, ‘Bringing back the old pension scheme is one of the biggest revdis (populist giveaways) that are now being invented.’

Manmohan Singh, your prime minister in 2004-14, had also castigated OPS as a fiscal millstone. So, two of the greatest economists ever to grace the Congress party have denounced OPS after hailing NPS. What great wisdom has persuaded you that your two economic giants were nitwits? Is this the desperation of a sinking party with no new ideas?

Under OPS, central and state government employees got a pension fixed at 50% of last-drawn basic pay, and this kept rising with inflation. Across the world, such a ‘defined pension’ has proved to be a fiscal millstone that hogs a rising share of government revenues at the expense of other urgent needs. So, countries across the globe have shifted to a pension based on ‘defined contributions’. NPS aimed to do this.

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 the labour aristocracy always resented the deduction of 10% of salary towards pensions.

In 1990-91, the Centre’s pension bill was ₹3,272 crore, and the states’ bill was ₹3,131 crore. By 2020-21, the Centre’s bill had jumped 58 times to ₹1,90,886 crore, and the states’ bill 125 times to ₹3,86,001 crore. NPS aimed to end this march into the fiscal abyss.

In technical parlance, OPS was unfunded. No corpus of funds had been created to ensure a stream of income that would suffice to pay future pensions. The 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.

This is both financial insanity and intergenerational injustice. Instead of each generation providing for its old age through contributions to a fund – as with the provident fund (PF) – a defined pension means the current generation places enormous burdens on future generations. This will, at some point, cause financial collapse.

It Pays for Itself
To stave off such a crisis, 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 what NPS does.

Rahul, you have jumped on to the bandwagon of the government employees to gain votes. This smacks of short-term opportunism and bankruptcy of thought. You should remember the passionate NPS advocacy of Manmohan Singh addressing a chief ministers’ meeting in January 2007:

‘Even in the states, all of you must be faced with the rising cost of pension liabilities which compete for your limited resources. All of you have large expenditure obligations to meet for ensuring the rapid development of your states. Therefore, we need better management of our pension liabilities so that state finances can be managed in a healthy, sustainable way in future…. India is on the cusp of its demographic evolution and will miss out on a wonderful opportunity to put in place the social safety nets which an ageing population will soon demand. We should, therefore, collectively address this important issue, so that we can grasp this opportunity before it becomes an insurmountable problem.’

Rahul, in the 2019 election campaign, you promised a whopping ₹72,000 to the poorest 20% of households if elected. This would have sunk the exchequer. But you were desperate to somehow attract voters. Alas, you lost credibility as well as seats. Your promise to abolish NPS will not be quite as catastrophic. But it is not the path to power.

This article was originally published by The Economic Times on Nov 29, 2022

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