The old pension scheme as a burden on the poor

Source- The post is based on the article “The old pension scheme as a burden on the poor” published in “The Hindu” on 23rd March 2023.

Syllabus: GS3- Economy

Relevance–  Issues related to public finances

News– The employees of some state governments are demanding the return to OPS. Some states like Rajasthan and Himachal have introduced OPS.

What are the challenges related to the introduction of OPS?

Economic status of government employees– The Sixth Pay Commission had substantially increasedthe basic salary of government employees to cover pension contributions. The basic monthly salary of a Class 4 employee as per seventh pay norm is ₹25,000.

The World Inequality Report 2022 estimated the average monthly income of the bottom 50% of the population to be ₹4,468, whereas it is ₹14,669.7 for the middle 40%. The salary of a government employee is higher than the income of more than 90% of the population.

Thus, the OPS acts as a regressive redistribution mechanism that favours better off classes.

Rising pension liabilities– The pension liabilities of the government increased due to a substantial hike under the Sixth pay matrix to pay for OPS for existing employees.  As a result, pension liabilities substantially increased to 9% of total States expenditure. They are expected to increase in the future.

The pension liabilities of States account for 1.2% of GDP as on 2021-­22. From 2004 to 2019, the pension expenditure of States registered an average annual growth of 16%.The aggregate receipts of State governments had an average growth of a mere 13.41%.

Assuming this rate constant, the share of pension expenditure will account for 14.7% of total State expenditures by 2040, and 19.4% by 2050.

Burden on the poor– Many State governments have yet to implement the Seventh pay norms, whereas some States have reportedly not paid arrears of the Sixth pay. Governments at the State level do not have fiscal autonomy.

Currently, the bottom 50% of the population bears the burden of indirect taxation six times more than their income. Due to the OPS, the bottom of the pyramid population has to bear the burden of OPS expenditure. It will push them into destitution and abject poverty.

OPS will create expenditure challenges for providing public goods. It will deprive a large population of basic necessities.

What is the way forward for resolving the pension issues of government employees?

Opposition to the OPS should not be a weapon for downsizing the government. It should be used to argue for a more equitable distribution of resources and universal provisions of public goods.

A participatory pension for government employees will provide a more egalitarian outcome. To protect employees from the vagaries of the market, the government can tweak the NPS to provide a guaranteed monthly return.

Administrative reforms are required to address unequal pay among various ranks of employees.

Government employees as a group have a voice and easy access to decision ­making. They can demandrationalisation of political executives’ pensions and profligacy.

They can also exert influence to introduce progressive taxation for the top 10% to address poverty and growing inequality.