The Old Pension Scheme wildfire must be stopped before it’s too late

Pensions, including both OPS and NPS, currently cover barely 3.2% of India’s workforce but they collectively gobble 18% of government revenues.
Pensions, including both OPS and NPS, currently cover barely 3.2% of India’s workforce but they collectively gobble 18% of government revenues.

Summary

  • India’s ageing will be rapid and we need a fully-funded pension system with wide coverage that ensures social security for all the elderly. For that, the OPS ghost must be banished.

The political battle between protecting the National Pension System (NPS) and going back to the Old Pension Scheme (OPS) is heating up, thanks to the various state elections just started. The political victory of the Congress party in the 2022 Himachal Pradesh elections, even if by a tiny vote-share margin, is being attributed to the promise of bringing back OPS. Indeed, that promise was promptly redeemed after the newly-elected government took office. But attributing the keenly-fought victory to the single issue of OPS may be the wrong lesson to draw. The NPS was launched nationwide on 1 January 2004 by the National Democratic Alliance (NDA) government led by PM Atal Bihari Vajpayee. Did the NDA lose the national elections later that year due to the introduction of NPS? There are dishonest pundits who will claim that the NDA paid the price of reforming the pension system. My contention is that electoral outcomes are more swayed by emotional issues, so post facto attribution to single causes is always misleading, if not outright wrong. Public opinion and voter passion is being stirred by presenting the OPS as ‘pro-people’ and NPS as ‘anti-people.’ Meme creators and slogan writers are busy making graphic and emotive campaigns. It would be a serious setback to fiscal stability if OPS is resurrected. That is not to say that the NPS cannot be tweaked to tackle the issues that have come up, genuine or perceived. Or that as a political compromise, a hybrid of the OPS and NPS (tilted toward the latter) could be implemented.

Pensions under OPS represent mounting unfunded obligations of governments. They are the path to bankruptcy, even if it is the path of the slowly boiling frog in the water. OPS guarantees a lifetime pension linked to one’s last drawn salary, and keeps rising due to wage indexation. But the NPS nest-egg is jointly created by the employee and employer during the working lifetime. So, there is no unfunded obligation post-retirement. As cited in an editorial in this paper, a report by Hyderabad-based Foundation for Democratic Reforms (FDR) paints a dismal picture if OPS is allowed to continue. West Bengal never signed on to the 2004 reform to NPS and has stuck to OPS. And states like Rajasthan, Punjab, Chhattisgarh and Jharkhand have announced an intention to join the OPS bandwagon, just like Himachal. The Andhra Pradesh government has made detailed calculations based on a rigorous model and these have been validated by actuaries to evaluate the impact of a switch to OPS. These show that in just seven years, the entirety of the state’s own revenue would be eaten up just by salaries and pensions. There would be no money left for even paying interest on loans, leave aside development expenditure. These calculations are applicable to almost all states. The growth in the pension burden on their exchequers would be staggering, as documented by the FDR report. In 1990-91, the expenditure on pensions as a share of states’ own revenues was 7.9%. By 2020-21, this had reached a whopping 27.4%. Keep in mind that pensions, including both OPS and NPS, currently cover barely 3.2% of India’s workforce. But they collectively gobble 18% of government revenues. Why do the other 96.8% of Indian workers not protest this unfair allocation? The provision of social security in developed countries is near-universal and eats up a much smaller portion of government revenues. In the US, every person over the age of 65 gets a basic pension, which is augmented by an individual retirement account much like NPS. But the US government’s social security fund gets contributions from all working people. Size wise, social security makes up 15% of government revenues but covers nearly 94% of the workforce. In the UK, the coverage is almost 100%, even as the expenditure share of pensions is only 12.6%. Most developed countries have made the switch from pension systems with defined and guaranteed benefits to ones with defined contributions. India rolled out this reform in 2004, but 20 years later, it has run into rough weather. The OPS has both intra- and inter-generational inequity built in. Its guaranteed benefits not only grab an increasing share of a government’s current revenues, but also deprive unborn generations of their fair share. Running high deficits is like stealing from the future, not just borrowing from those unborn taxpayers.

The vast majority of voters are not affected by the OPS-vs-NPS choice, but may be swayed by fiery campaigns. It is said that Himachal has a somewhat peculiar demography, in that almost every household has at least one member working for the government or armed forces, giving OPS politics salience. Yet, its role as the sole reason for a poll victory is doubtful. The tiny but vociferous and highly-organized minority of OPS wannabe beneficiaries are playing with fire.

India’s fiscal situation is nothing to be complacent about. It is an outlier among major economies, going by debt servicing ratios. Its debt-to-GDP ratio is too high, given that there is virtually no burden due to social security on India’s sovereign debt. There is no use saying that we can kick the can down the road since more young people will be born, which will keep the per capita tax burden low. India’s ageing will be rapid, as even now half of all states have a total fertility rate below the replacement rate. A fully-funded pension system with a wide minimum coverage of social security for all the elderly is a must. For that to happen, the ghost of OPS must be banished.

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