Political parties, including the ruling party at the Centre, and chief ministers find themselves on the horns of a dilemma. It is on the question of pension.
Not all citizens of India of a certain age get a pension. There is no social security scheme in India that offers a pension to a citizen. Millions of persons employed in the private sector do not get a pension on retirement. Even short service commissioned officers in the Indian defence forces do not get a pension.
Pension Wins Argument
As long as life expectancy was low, pension was of little consequence. Few got a pension but fewer lived for long after retirement. In 1947, when India became independent, the life expectancy was under 35 years. Today, it is slightly over 70 years. The obligation of pension will, on average, remain for 10-12 years after retirement and may continue to the spouse if there is the concept of family pension. That is why most employers are wary of pension. The employees have a powerful case: pension is a right earned through long and loyal service; or pension is a deferred wage; or pension is the path to the right to live with dignity after retirement.
In the case of government employees, the ‘right to pension’ won the argument and that was the right verdict. To those who pointed to the sections of the people that do not have a right to pension, the answer was that the right to pension must be extended to them too. In fact, there should be a universal pension scheme open to all sections of the people.
As pensions for government employees took root, the concept of an assured minimum pension also took root. The concept settled at 50 per cent of the last drawn basic salary and dearness allowance.
Changed Dynamics
When the New Pension Scheme (NPS) replaced the Old Pension Scheme (OPS) in January 2004, it disturbed two pillars of pension: it radically altered the non-contributory defined benefit scheme to a defined contribution scheme and it quietly discarded the concept of a minimum pension. Protests started. A B Vajpayee, then prime minister, did not yield and his successor, Dr Manmohan Singh, also did not yield ground for 10 years. Likewise, Mr Narendra Modi did not yield ground for 10 years, but the verdict in the 2024 Lok Sabha elections has completely altered the dynamics.
According to a PIB release on August 3, 2022, the total number of central government pensioners was 69,76,240. The budgeted expenditure on pensions in 2024-25 is Rs 2,43,296 crore. According to media reports, as of March 2023, NPS had 23.8. lakh central government subscribers and 60.7 lakh state government subscribers. In 2024, the numbers may be a little more or a little less, but we know the ball park figures. It is a fraction of the population of India.
An unfunded pension scheme – which is what the OPS was – will lead the economy to a financial shipwreck. Governments cannot ‘pay as you go’ from current revenues. Someone has to fund the scheme. It is either the government or the employees or both. NPS was a scheme funded by both the government (14 per cent) and the employee (10 per cent). ‘Funding’ is sound economics.
The Unified Pension Scheme (UPS) announced by the government is a scheme funded by the government (18.5 per cent) and the employee (10 per cent). UPS has also guaranteed a minimum pension of 50 per cent of the average basic salary drawn over the 12 months preceding the retirement for those completing at least 25 years of service. A minimum pension of Rs 10,000 a month that will be adjusted for inflation has been assured. The fine print is awaited.
At the time of writing, most state governments have not commented on UPS. Major political parties, including the Congress, are deliberating over UPS. However, several associations of central government employees and several central trade unions have opposed the contribution of the employee to the pension fund.
Funding, Who And How?
It is a perfect dilemma for governments, political parties and employees’ associations. Speaking from a purely fiscally-conscious point of view, the UPS ought not to be rejected out of hand. Some questions, however, remain:
1. Will the difference between the employee’s contribution and the government’s contribution, now 8.5 per cent, widen in the future?
2. Mr T. V. Somanathan said that “the government will make good the shortfall”. Is this not just a step away from ‘pay as you go’?
3. While the 10+10 per cent of the contributions will be entrusted to approved Pension Fund managers, will the 8.5 per cent contribution be invested and, if so, by whom and where?
4. The additional funds for the first year of Rs 6,250 crore appears to be understated; is that true?
5. Were the state governments consulted before UPS was approved by the Cabinet? Will the employees’ associations come on board?
Let’s see how the stakeholders get off the horns of the dilemma.
