The attenuated state of the contemporary social welfare system is exemplified by the state of the pension system in India. Till 2004, government employees and teachers were part of a defined benefit pension system that is known as the old pension scheme (OPS).
Each employee paid a certain fraction of their basic pay to a general provident fund whose return was guaranteed by the government. At the time of retirement, employees got their corpus back with tax exempt compound interest. Further they also got an inflation indexed monthly pension whose basic component was half of the last drawn basic pay.
Given the inability of the Indian state to raise adequate tax revenue from those with extremely high incomes, the government which bound itself with the Fiscal Responsibility and Budget Management Act now effected a shift towards a defined contribution system known as the new pension scheme (NPS).
Under this new pension scheme, an employee and the government contributed a certain fraction of their basic pay and dearness allowance. The size of the resulting corpus at the time of retirement depended on the “performance of market” during this period which could often be underwhelming.
After retirement, 60% of the corpus was returned to the employee while the depositing of the remaining 40% in an annuity yielded a pension. There is no inflation indexation under the NPS. Clearly the NPS is inferior to the old pension scheme both in terms of quantum and inflation indexation of the pension.
Government employees and teachers have been protesting against the paltry and volatile nature of the NPS. After the partial setback in the Lok Sabha elections in 2024, the Bharatiya Janata Party led union government of India seems to have come to the conclusion that persisting with the NPS would result in further electoral reverses.
Consequently the union government of India has come up with a unified pension scheme (UPS) which is seemingly a hybrid of the OPS and the NPS. First, the contribution of the employee remains a fraction of the basic pay and dearness allowance of the employee while the government will pay a slightly higher fraction.
The corpus will accumulate on the basis of the “state of the market”. Second, the government claims that all employees in the UPS will receive a pension that will equal half the monthly average of the last year’s basic pay plus dearness relief. Unlike under OPS, the promise of a defined benefit pension under UPS requires a non-returnable contribution from employees and teachers.
However the UPS, which is supposed to be inaugurated from April 2025, but not yet extended to teachers, leaves open a number of questions. First, the government has not clarified what will happen if the market return is less than the defined benefit pension pay-out in any year.
Logically there are the following possibilities: first, the government will make good the aforesaid gap but there are apprehensions since the government has repeatedly reiterated that the UPS is a fully funded scheme unlike the OPS and therefore not a “fiscal burden”; second, the government could sufficiently delay the payment of the pension or dearness relief on the pension; third, the government may increase the fraction of the basic pay and dearness allowance that employees and teachers are required to contribute; fourth, the corpus could be run down to meet current pension payout; fifth, the government could nudge with the private corpus managers to shift the deployment of the corpus towards financial assets that may promise higher returns but would also be excessively risky.
Evidently, none of the alternatives barring the first will result in the UPS remaining a defined benefit pension scheme.
These concerns are not illegitimate since the Somanathan Committee recommendations on which it is based has not been made available in the public domain. Moreover, the return of part of the corpus is only six days for every completed year of service which is inferior not only to the OPS but also the NPS.
Besides, the minimum years of service required to receive full pension has been increased from 20 years in the OPS to 25 years in the UPS. This will adversely impact many teachers who become permanent only after they have turned 40.
The argument that a defined benefit pension scheme is fiscally burdensome is not logically tenable. Pensioners are likely to spend their entire pension amount which will increase demand, output and tax revenue both due to indirect and direct taxes. Since this increase in demand will be both high and stable, not only will investment rise but so will innovation resulting in a further rise in tax revenue.
Therefore, the demand for the reinstatement of the old pension scheme by government employees and teachers will not only enhance social welfare but will also be sensible in terms of macroeconomics.
Mithuraaj Dhusiya is Associate Professor, Department of English, Hansraj College, University of Delhi.
C. Saratchand is Professor, Department of Economics, Satyawati College, University of Delhi.
