Demand of One Rank One Pension by Defence, Railway, CG Employees vs New Pension Scheme: Opinion on LiveMint
How we should think about the One Rank One Pension issueOne parity we should be discussing is parity with central government employees who have been moved to a defined contribution scheme from defined benefit since 2004
Each
of us has some link at a family level, direct or indirect, with the
armed forces. A parent, a brother, an uncle, a cousin, a son, or a
nephew. At a personal level, we know the first-hand stories of a wife
not knowing if an ‘exercise’ will end in a dead husband. Of a father not
knowing if the next landmine will have his son’s name on it. At a
societal level, we can’t forget the border battles, and much closer
home, the comforting presence of the army trucks and the green helmets
as they rolled in after the 1984 riots to calm fires in West Delhi
residential clusters. Can’t forget that when everything else fails in
civic life, the army is called in to restore order. The army is called
in not just to maintain order, but even for things like making that foot
over-bridge that kept collapsing before the Commonwealth Games. And we
have to only look over to our immediate northwest to see what damage an
army can do to a nation.
How can the nation
then say no to the one demand that the men in uniform are making—give us
enough when we remove the uniform and lead civilian lives? The heart
says it should be done. So why the delay? It could be that the answer is
not always that simple. The One Rank One Pension (OROP) issue that
seeks to index old pensioners to benefits that current ones get, has got
all the ingredients of a perfect bomb: an emotive issue, kicked around
by cynical politics of an outgoing government promising something it
knew it would not be responsible for, an aspiring change maker who did
not understand the multi-dimensional issue that OROP is and making a
promise to implement it. And now a public stand-off between the veterans
and the government.
Why is the issue so
difficult to deal with? Why not just give the armed forces what they
want? The issue is complicated on two counts (there are many other
issues, of course, but I think these two are key). One, the country does
not have the money over time to fund a rising bill of defined benefit
(DB) pensions. DB pensions give the person retiring a certain percentage
of his last salary, keeping in mind the number of years worked. DB
schemes are ultimately un-fundable since declining populations find
fewer people funding larger and larger numbers of the retired. Many
countries across the world are in the process of moving away from DB
plans. Two, and even more disastrously, OROP will open the doors for
similar demands from other groups. Do Central Reserve Police Force
soldiers deserve any less? What about the Indo-Tibetan Border Police?
And the police? The first off the block has been the railway unions
demanding OROP. “Railwaymen are performing dedicated service for the
nation. Railway is the lifeline of the country. Employees are working
round the clock across the country,” the general secretary of All India
Railwaymen’s Federation was quoted as saying in a newspaper report.
Other unions are waiting and watching, and once OROP is announced,
expect a deluge of protests and court cases for parity.
The
one parity we should be discussing today is parity with central
government employees who have been moved to a defined contribution (DC)
scheme from a DB since 2004. DC schemes put control of the future in the
hands of the individual and what the state needs to do is design an
efficient system that is fair to the social security seeker. India has a
state of the art DC vehicle in the National Pension System (NPS). The
costs are wafer-thin, the products are few so as to not freeze choice,
and there is no fund manager risk since equity investing is restricted
to index funds. For those unwilling or unable to choose the right fund,
there is a default lifecycle fund that reduces equity as the person ages
and moves into safer debt. The government should use the current focus
on pensions to negotiate the move from DB to NPS for all categories of
pensioners—those already on a DB, but, as was done with the civil
services, from a given date, all new employees move to the NPS.
The
armed forces have almost seven decades of goodwill banked, but an
uncompromising demand irrespective of the consequences may change this
equation. Unhappily for us, there are no recent academic studies that
show what state pensions cost the nation. There is a 2006 paper that has
some estimates (which are scary) and can be read here:
http://mintne.ws/1J0DNWx . Even this old study clearly showed that DB
pensions are unsustainable. Now to open the door for OROP for all
categories of government employees will be a fiscal disaster for India. A
more middle-of-the-road solution may be the only one that is
sustainable without derailing the future of the country. No person who
has defended the country against the dushman will want to see the
country ship out gold one more time because OROP has opened the doors to
a future that is unsustainable. If a middle-of-the-road solution is not
acceptable, we only need to look west once again. This time, a little
further than our immediate neighbour, to Greece, and see what runaway
benefit bills can do to a nation. And because of the colour coding rules
of the world, India should not expect the global multilateral agencies
to expend the same kid gloves that Greece has been dealt with.
Monika
Halan works in the area of financial literacy and financial
intermediation policy and is a certified financial planner. She is
editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB
India. She can be reached at expenseaccount@livemint.com
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