Dangers ahead: Return of old pension scheme after polls under Opposition rule?

Economists have raised a red flag over the return to the old pension scheme. But our current politicians are on a sole mission to win elections. Will the coming generations pay the price for their mistakes?

Shekhar Iyer
27 Nov 2022
Dangers ahead: Return of old pension scheme after polls under Opposition rule?

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New Delhi: The Atal Bihari Vajpayee-led National Democratic Alliance (NDA) government had introduced the New Pension Scheme or National Pension System (NPS) in 2003. It persuaded the states to adopt it to reduce their pension liabilities.

The UPA government led by Dr Manmohan Singh vigorously implemented the new pension scheme.

This was applauded by economists who said it was a welcome bi-partisan move to tackle the fiscal crisis threatening to spiral out of control.

What is old pension scheme (OPS)

In the old pension scheme, employees got 50% of their last drawn basic pay plus dearness allowance on retirement. Employees did not have to contribute to their pensions. The dearness allowance is added every six months based on inflation.

What is new pension scheme (NPS)

Under NPS, individual savings are pooled into funds during their period of employment. Individuals can choose from a range of schemes promoted either by public sector banks or private companies.

The return to the old pension scheme has been a long-standing demand of a large section of government employees in many states.

So the opposition has sensed that it is a good issue to corner the BJP even if it was implemented by the Congress-led UPA.

If feedback from Himachal Pradesh is to be believed, the Congress' promise to bring back the old pension scheme has gone down well with large sections of pension voters.

It has given a big boost to the party. The state went to polls on November 12 and the results will be out on December 8, along with that of Gujarat.

Just before the polls were announced, Prime Minister Narendra Modi had sought to warn of the dangers of populism to woo voters, particularly freebies or "revadis" to win elections.

But the upbeat mood in the Congress camp in Himachal Pradesh following the voting on November 12 has got alarm bells ringing not just in the BJP -- but among all those who think reversing pension reforms is not just bad economics but also bad politics in the long run.

As the BJP worries over the impact of the "pension promise" on its electoral prospects, the Congress governments in Rajasthan and Chhattisgarh have already reverted to the old pension scheme.

Last week, the AAP government in Punjab too decided to return to the old pension scheme --with an eye on wooing voters in Gujarat, which goes to polls on December 1 and 5. The Congress too has promised the old pension scheme if it wins in Gujarat.

But who will pay if the old pension scheme makes a comeback? Pension payments already account for almost 80% of the total tax revenues generated by Himachal Pradesh on its own. If Congress wins and implements the old pension scheme as promised, the pension bill alone will eat up the tax revenues of the state.

This has got many economic experts like former Planning Commission Deputy Chairman Montek Singh Ahluwalia very worried. “…I think what the Prime Minister rightly called the revadis of the world and there are many more revadis than what we thought. I mean bringing back the old pension system is one of the biggest revadis that are now being invented."

Most state governments face a dangerous state of finances. They often complain that they don't have money to pay salaries to school teachers and nurses. They are burdened with debt too.

Himachal Pradesh may turn out to be one example of how the fiscal prudence of the last two decades is squandered away by irresponsible politics in the name of welfare and to win elections.

In Punjab, where the government is promising a lot of freebies, a report by the Sixth Punjab Finance Commission (released in September 2022) says that the state exchequer has already a debt that is more than 48% of the state GDP. 

The report forecasts that the situation will become even more grim next year.  The debt will rise from Rs 2.84 lakh crores in 2021-22 to Rs 3.05 lakh crores in the current financial year.
One can well imagine the consequences once the government goes back to the old pension scheme.

We know that, despite the new pension scheme, the outflow on account of pensions for the central government went up from Rs 3,722 crores in 1991 to Rs 2.08 lakh crores. The outflow for the states rose from Rs 3,800 crores to Rs 3.86 lakh crores.

In other words, the Centre’s bill had jumped 58 times and for the states, it had gone up 125 times.

The main problem with the old pension scheme was that the pension liability remained unfunded. There was no corpus that could be dipped into for payments. It was unsustainable. Liabilities on account of pension are bound to increase every year just like the salaries of serving employees. Just like dearness allowance for the existing employees, the pensioners gained from  ‘dearness relief.’  

With the life expectancy going up,  the burden on the exchequer would stay on for a long, long time.

On the other hand, NPS  for Central government employees, which was notified on December 22, 2003, was for prospective employees. All new recruits joining government service from January 1, 2004 were mandated to accept it. 

Initially,  the contribution comprised 10% of the basic salary and dearness allowance by the employee and a matching contribution by the government. In January 2019, the government increased its contribution to 14% of the basic salary and dearness allowance. Individuals can choose from a range of schemes from low risk to high risk, and pension fund managers that are promoted by public sector banks and financial institutions, as well as private companies. The schemes under the NPS are sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Adita Birla, Tata, and Max. 

The 10-year return for the NPS Scheme-Central government floated by SBI, LIC, and UTI stood at 9.22%; the 5-year return at 7.99%, and the 1-year return at 2.34%. The returns on high-risk schemes could be as high as 15%, it was estimated.

As on October 31, 2022, the Central government had 23,32,774 NPS subscribers, and states had 58,99,162 subscribers. The corporate sector had 15,92,134 subscribers, and the unorganized sector 25,45,771. There were 41,77,978 subscribers under the NPS Swavalamban scheme. The total assets under the management of all these subscribers stood at Rs 7,94,870 crore as on October 31, 2022.

Now, what will happen if politics and the compulsion to win elections somehow leads to a situation where there is a comeback for the old pension scheme? One can understand that welfare sometimes must triumph over fiscal prudence if the poor and deprived are the prime beneficiaries. But freebies are being promised indiscriminately by all political parties when elections threaten their survival. 

Electricity consumers in Delhi get free power up to 200 units per month. There is no income criteria. There has been an attempt to tweak the policy now but even a millionaire can still consume free power.

Apart from free electricity, there are many other "freebies" that will sooner or later, become a big problem to go on forever.

Therefore, for political parties to insist on bringing back the old pension scheme under such circumstances may appear to be even an irresponsible act.

Ironically, both the NDA and UPA regimes have supported pension reforms. The Congress leadership, which prides itself for bringing reforms that subsequent governments have taken forward, shares the credit with the BJP for introducing the new pension scheme. Then, why does the Congress under Rahul Gandhi want to put the clock back for the sake of returning to power? Isn't prudent politics also prudent economics and vice versa?

We do not know what former Prime Minister Manmohan Singh is thinking now as his party has changed its line. As the PM, he had defended NPS as one of the major reforms of his government. It was enacted in the UPA’s first term.

Both current and former Comptrollers and Auditors General of India have raised a red flag over the return to the old pension scheme. But our current politicians are on a sole mission to win elections. Will the coming generations pay the price for their mistakes?

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