Arshad Shaikh examines the recent clamour by different state governments to revert to the Old Pension Scheme (OPS) from the current National Pension Scheme (NPS). The subject of pensions offered to retired government employees has brought forth many questions – who should fund pensions and why? Why was the NPS introduced? Are governments unable to afford pensions? If so, how are state governments promising the scrapping of NPS and returning to the OPS? What about the future when the demographic dividend will no longer work for India? Why is the falling fertility rate not being debated? The looming pension crisis is a ticking time bomb that must be defused if we want to save our retirees from penury and misery.
The Government of India (GoI) launched the National Pension Scheme (NPS) in 2004. Now after nearly two decades, various state governments want to go to the Old Pension Scheme (OPS). Rajasthan, Chhattisgarh, Jharkhand, Kerala, Andhra Pradesh, and Assam wish to discard the NPS.
The CM of Delhi, Arvind Kejriwal announced publicly that he would implement the OPS if the Aam Aadmi Party (AAP) came to power in Punjab. AAP won the elections, and in November 2022, the Punjab Cabinet approved the return to the OPS. Similarly, the Congress party promised to bring back the OPS in the run-up to the assembly elections in Himachal Pradesh. It won the elections. The Himachal Cabinet has decided to implement the OPS in the state from FY23.
So, what is this OPS, and why are these non-BJP states eager to exit the current NPS? The GoI accused these state governments of indulging in populism and promoting a freebie (rewadi) culture. The subject of pensions is intertwined with other issues like demographic dividend, fertility rate, and defined benefit. The whole debate about fiscal prudence and the intergenerational contract also kicks in. Retirement can become a nightmare if policymakers do not solve the looming pension crisis.
NPS SUCCEEDS OPS
The National Pension Scheme (NPS) was launched by the NDA (Vajpayee) government in 2004. The NPS applied only to (civilian) employees. The armed forces were kept away from the NPS. It replaced the Old Pension Scheme (OPS) that was based on the “Defined Benefit Plan” model of awarding pensions. Under the OPS, retired employees would receive a fixed monthly pension, which was calculated as 50% of their last drawn salary.
The good thing about the OPS was that the retiree was assured of a predictable fixed life-long income as the pension also had an incremental variable component to account for inflation. However, the burden of funding this pension was completely on the government and thus indirectly on the taxpayer. The GoI does not have any specific fund to foot the pension bill. It is paid through the Consolidated Fund of India, which is directly dependent on income tax, corporate tax, GST, customs and excise.
Pension costs to the government increased from `3000 crores in 1991 to more than `3.83 lakh crores in 2021. In many states, the total pension bill is increasing by 27% while the corresponding tax revenue is increasing only at a rate of 10%. Thus, the OPS was junked as it was projected to be financially unviable for the government in the long run and a drag on the treasury.
THE RISKY NPS
According to the NPS Trust website, “NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India.”
Under the NPS, every month, both the employee and the employer contribute 10% of the salary of the employee towards a pension fund. The fund is managed by notified fund managers. Upon retirement, the employee is entitled to collect his/her accumulated pension which consists of the employee’s contribution, the employer’s contribution and the interest accumulated thereof.
However, there is a catch. The employee can claim only 60% of that fund for withdrawal or consumption as per his/her choice. It is mandatory for the employee to invest the balance 40% of the pension fund into an annuity plan. The GoI has established the Pension Fund Regulatory and Development Authority (PFRDA) to supervise the NPS. In the context of NPS, annuity implies the monthly payment given to the pensioner by the PFRDA-approved fund manager. The fund manager invests the pension fund in the bonds and equity markets and tries to derive maximum returns for the fund.
Thus, the monthly pension is not fixed. It is highly uncertain and linked to market conditions. Returns are completely dependent on the financial skills of those managing the pension fund. The pension plan is now a “market-based plan” under the NPS and subject to “market risks”.
THE PENSION CRISIS
One of the important reasons for the introduction of the NPS is the depleting fertility rate in India. India’s total fertility rate (TFR) has dropped to 2.0 in 2019-21 from 2.2 in 2015-16. The replacement level fertility (the rate at which a population duplicates from one generation to the next) is 2.1 children per woman. Today we are achieving that replacement level fertility.
The demographic dividend (the share of the working-age population 15 to 64 is larger than the non-working-age share of the population 14 and younger and 65 and older) that we are enjoying today is because of the strong fertility rates we maintained in the previous decades. However, with the projected decline in fertility in the coming decades there will not be enough taxpayers to fund the growing number of retirees.
Moreover, with increased life expectancy, the payout to the pensioner is much longer. In addition, after the death of the retiree, his/her spouse is entitled to a portion of the pension under the Old Pension Scheme. This has necessitated the switch from a “Defined Benefit Plan” to a “Market Based Plan” for funding retirees. India’s pension system was ranked 41 among 44 nations in the Mercer CFS Global Pension Index.
THE BIGGER PROBLEM
All this discussion is about those who are employed and will be covered by some or the other pension scheme. According to a working paper by the National Institute of Public Finance and Policy (NIPFP) –“At least 85% current workers are not members of any pension scheme and in their old age likely to remain uncovered or draw only social pension. Of all elderly 57% receive no income support from public expenditure, and (only) 26% collect social pension as part of poverty alleviation.”
Undoubtedly, the old and those growing old are in trouble. Their future after retirement is uncertain. Their fixed pension has been snatched away. It is now variable and subject to market conditions. Families are breaking apart. Parents cannot count on their children for looking after them in their old age. The state is backing out of all welfare measures for retirees. Fertility rates are dropping and ageing populations are on the rise.
Unless there is a dramatic change in our outlook regarding life, things are bound to move from bad to worse.The way out is restoring our belief in the power of our Creator to provide sustenance for humanity. The Qur’ān (17:31) says, “Do not kill your children for fear of poverty. We provide for them and for you. Surely killing them is a heinous sin.” In addition, looking after the elderly should become a religious duty. The Qur’ān (17:23) says, “Be kind to parents. Whether one or both of them attain old age in thy life, say not to them a word of contempt, nor repel them, but address them in terms of honour.”
As a quote goes, “If your parents cared for you, care for them. Even if they didn’t care for you, if you have the opportunity to do so, care for them. One day you will be older. Once again, unable to care for yourself. Who will care for you? What goes around, comes back around.”