Column: Rational Expectations: Short
step from OROP to Greece
As OROP-type demands spiral, so will pensions—the present
value of govt pensions is already 1.2 times GDP
The underlying theme of the
One-Rank-One-Pension (OROP) debate is one of a nation needing to do right by
its war veterans. The veterans, the argument goes, put their lives at risk to
defend the motherland, so surely a grateful nation can ensure they have a
decent living? How demeaning it is, the argument goes, that a colonel who
retired in 1980 should be getting a pension lower than his son who retired in
2010.
Emotional arguments, however, only
obfuscate the issue. A pension is really nothing but a deferred payment of
wages, to help those that served—in the army, in schools, in hospitals,
wherever—maintain a certain standard of living after retirement. To that
extent, it has to be related to the salaries paid during a person’s working
life. So, to use the logic of those in favour of OROP, if the country wanted to
reward a soldier more, his salary should have been much higher than it was at
the time he was serving, there’s no point hiking it post-retirement. In any
case, OROP was never a term of service.
And it is not as if the nation is
not doing right by its soldiers after they retire, or by its bureaucrats, for
that matter. The colonel-father getting a pension lower than his colonel-son
conveys the impression that veterans are living in penury, but that is not true
for either them or the millions of civilians the government has on its
payrolls.
Some examples are worth keeping
in mind. In the case of the army, 12 years ago, a colleague’s mother got a
monthly family pension of R8,000—her father retired as Lieutenant Colonel—but
this is now R40,000. On the civilian side, an additional secretary who retired
5 years ago got R57, 000 as pension then, but gets R75, 000 today.
A joint
secretary who retired in 2004 got R35, 000 as pension then, and this has gone
up to R60, 000 today. In the case of a secretary who retired in 1993, the
pension has gone up from R4, 000 then to R102, 000 now! Whether for army
officers or for bureaucrats, pensions have been galloping and the biggest
beneficiaries are those whom have been retired for a longer period of time. Do
the same exercise for anyone not employed by the government, whether a humble
peon or the chairman of Hindustan Lever, or those who save 24% of their salary
in the EPFO—there are 6 crore such people today—and you will find there is no
such equivalence, anywhere.
The reason for this is the way
the government calculates its wages, and therefore salaries. So, let’s say a
person—this applies to joint secretaries, teachers, havildars, colonels,
everyone employed by government—retired in 1995 with a basic salary of R10, 000
and a pension of R5, 000 based on the principle of pension equalling half of
the last pay. In the case of all non-government employees, this amount would be
worth nothing today given inflation in the last 20 years. In the case of
government employees, however, the salary/pension is indexed to inflation. So,
between 1995 and today, the basic salary—and therefore pension—will be
increased every year to take into account inflation.
And every 10 years, a Pay
Commission comes and takes care of the rest. Let’s go back to our government
employee and assume he was in the middle of a scale running from R8, 000 to R12,
000. Between 1995 and 2005, while the basic would have remained unchanged, the
actual salary would keep rising since the inflation-indexed dearness allowance
(DA) keeps rising. Now assume the last Pay Commission raised this pay scale to
R18, 000 to R24, 000. Immediately, the salary of those at the top end of the
pay scale would have risen to R24, 000, with the DA reduced to zero. And then,
from 2006 onwards, the DA would have started rising again each year till 2015,
when the new Pay Commission comes in.
What happens to pensions? This is
where OROP comes in since, once this is accepted for the armed forces, there
will be demands to extend this elsewhere also. For people who retired in 2005,
the basic salary is reckoned at R24, 000 in our example, as a result of which
the pension will be R12, 000—with, needless to say, a built-in DA hike twice a
year. Our friend who was in the R10,000 basic salary bracket finds his salary
getting hiked to R18,000—the lowest of the new pay scale—as a result of which
the pension rises to R9,000, with the DA clock set back at zero for the first
year. In the sense of people of the same rank getting different pensions, it
looks unfair, but does anyone who worked in 1995 get the same salary as someone
in 2015, or get to buy gold at the same price, or property? And, with the next
Pay Commission ready to submit its report by October—it is to be implemented
with effect from next April—our friend who retired in 1995 will get another
hefty pension bump.
Which is why defence pensions
have jumped from R11, 250 crore in FY05 to R21, 790 crore in FY10 and R54, 500
crore in FY16; for the government as a whole, it is up from R26,250 crore in
FY05 to R60,489 crore in FY10 to R127,507 crore in FY15. To put this in
perspective, India’s GDP rose from R29,71,464 crore in FY05 to R61,08,903 crore
in FY10 and to R1,25,41,208 crore in FY15—so as a share of GDP, India’s pension
bill rose from 0.88% to 0.92% in a decade. As a proportion of total government
expenditure, it rose from 5.3% in FY05 to 7.1% in FY15.
Another way to look at this is
what each pension costs. A retired secretary to the government of India today
gets a pension of R85,200. LIC charges R1 lakh today from a 60-year old to give
a monthly pension of R745—which means a monthly pension of R85,200 is
equivalent to a lump-sum payment of R1.14 crore! If the next Pay Commission
bumps the pension up to R100,000, say, the lump-sum payment goes up to R1.34
crore. If the government was to fork out a single bullet payment for its total
pension bill of R127,507 crore, it would have to pay R171 lakh crore, or 1.2
times FY16 GDP! Imagine how much this will go up by after the next Pay
Commission.
It is precisely because of this
unsustainable Greece-style pension crisis that, in 2004, the government decided
those joining the civil services would contribute a fixed amount of their
salary to the National Pension Scheme (NPS) with a matching contribution from
the government, and whatever money that earns would be the person’s pension;
naturally, this doesn’t grow anywhere as spectacularly as that of anyone
employed by the government currently.
This should have been done for
the armed forces as well, but didn’t, presumably because the government felt it
could bear the burden. No matter what the grievances of the armed forces vis-à-vis
the civilians who retire later than they do and therefore get a higher pension,
at some point, the government will have to consider moving to NPS for the armed
forces since the burden is sky-rocketing and OROP will raise it dramatically.
All pensions are a function, as we know, of salaries. So, if a colonel has been
in that post for 2 years, he will get a salary—and therefore a pension—that
will be different from a colonel who has been in the post for 6 months. Under
OROP, the pensions of all colonels will equal those of the colonel who has
spent the maximum number of years in the post! If this is now demanded by
teachers, babus, paramilitary forces and the police, Greece is just a step
away.
sunil.jain@expressindia.com
Dear Mr Sunil Jain,
I start my reply to your piece
with a disclaimer – having retired at the level of a Secretary to the Govt of
India, I am already in the OROP bracket as indeed are all retired and retiring
Secretaries and equivalents. So, I can be a bit more objective.
Let me now begin with your column
tail first. The presumption that, say the Col in your example who has been in
the rank for 6 months (a post in the
Armed Forces is different and examples are Battalion Commanders in the
Army, Captain of a smaller class of ship in the Navy and, a Squadron Commander
in the Air Force) will be, to quote your column, “Under
OROP, the pensions of all colonels will equal those of the colonel who has
spent the maximum number of years in the post!” is the kind of fallacy that is blinding intellectuals like you and
leading the powers that be to believe the fallacy.
In Circular No. 500 please visit
Annexures A to G (Pages 7 to 13). You will find tables with the rank (not post)
on the top of the X axis and Years of service in the Y axis.
Now let us get back to that
example you quoted. Promotions to different ranks in the Armed Forces are –
from Lt to Capt & equivalent after 2 years of commissioned Service, from
Capt to Major & equivalent after 6 years of commissioned service, from
Major to Lt Colonel & equivalent in 13th year of commissioned
service and from Lt Col to Col & equivalent in the 22nd year of
commissioned service.
Therefore, if one does what the
bank clerk does to determine my pension he will place look at the intersection
of the X axis (Colonel) and Y axis (22+2= 24 years service) and arrive at the
pension of Rs 26111 whereas the Col of 6 months (22+.5 year= 22.5 years) will
get Rs 24848 i.e. a difference of Rs 1263 per month.
Now, I travel up your column to
the New Pension Scheme (NPS) introduced for the Central Govt employees joining
after 1st April 2004. Please bear in mind that the NPS is neither
applicable to those who joined Govt service by or before 31st March
2004 nor the Armed Forces personnel.
In 1998, the NDA Govt decided to
increase the retirement age by 2 years, ostensibly to delay (or led by
erroneous advice) the pay out of increases of pension consequent to the
implementation of the recommendations of the 5th Central Pay
Commission. What the advisors and the NDA Govt might not have foreseen was that
those in service would drawn two more annual increments (and increases in DA)
and when they retire in or after year 2000, their pensions would have increased
by 50% of the increments drawn i.e. one increment. Incidentally, the earliest
that Govt servants contributing to the NPS from 1.4.2004 will withdraw or be
paid pensions will be from 1.1.2024 as 20 years is the minimum years of service
to be eligible for full pension! In the meantime everyone in Govt service will
draw their pensions under the previous rules and regulations!
Be that as it may, I would not
like to speculate on why the NPS was not made applicable to the Armed Forces
and await a reply to RTI filed on 23rd June 2015.
Defence Pensions and the amounts
quoted include 4 lakh civilian pensioners of the various departments in MoD and
not just the retired Armed Force personnel. You may wish to confirm from the
Central Pension Accounting Office website to authenticate. Curiously, you have
not mentioned that the MoF in its Statement of Revenue foregone for FY 2014-15
has stated Rs 62, 398.6 crores was given away as tax exemptions and incentives
to corporates. The website scroll.in states,”….. it is expected to
forgo revenue of
Rs 589,285.2 crore ($95 billion) in 2014-15 due to exemptions granted to
companies and individual taxpayers. This forgone revenue, or tax benefits, is
twice the defence budget allocation of Rs 247,000 crore in 2014-15. (Please see
http://scroll.in/article/711183/why-the-indian-government-is-forgoing-revenues-of-95-billion).
Now to the terms of service
and pension, there is a long list but that is for another day but this
requires your attention
A soldier posted in Kashmir
(other than high altitude) and northeast gets no special allowance, whereas a
policeman from the CPO gets double house rent allowance (HRA). When posted in
peace stations such as Shillong, Aizwal, Sikkim and better part of Jammu and
Kashmir, a soldier gets no extra allowance, whereas a policeman from the CPO
gets 12.5% of the basic pay as a special duty allowance, 25% of the basic pay
as hardship allowance for IAS officers of the UT cadre and detachment allowance
of Rs 300 per day for all central armed police forces personnel. None of these
allowances are applicable to the Armed Forces. Then there is what is called
headquarter allowance of Rs 4,000 for the civil services officials which the
officers of the Armed Forces don’t get. While the list of such difference is
long, just one more example should drive home the point as to how civil
services and the CPOs have feathered their nests. An Armed Forces officer on
instructional staff at the National Defence College gets Rs 1,800 per month
whereas one from the CPO and Civil services get Rs 19,000 per month. (Courtesy Lt Gen Harwant Singh (retd).
Please also take time to refer
to
46.
Pension is a retirement benefit for government employees governed by a Pension
scheme where in a recurring monthly payment for life and a lump sum gratuity is
given at the time of retirement. The quantum of Pension and Gratuity is
determined with reference to the length of service and last pay drawn. Pension has great significance since it is
a measure of socio-economic justice and brings economic security in the fall of
life when physical and mental prowess tends to ebb (emphasis supplied).
47. Judicially, Pension is
defined as a stated allowance or stipend made in consideration of past service.
In the event of death, spouse of pensioner gets a monthly payment for life
whereas other beneficiaries get such payment for limited period or for life
subject to certain conditions.
Finally, I
will address the issue that every other Govt employee or retiree will ask. It
is a bogey and I provide you an example.
MoD, in UoI vs
Lt Col N K Nair & Others in IA No. 9 of 2010 in TP (C) No. 56 of 2007 in
what is known as the Maj Dhanapalan or Rank Pay case, filed an affidavit that
if the judgement of the Honourable Supreme Court dated 8th March
2010 was implemented, civilian employees will also demand Rank Pay and the
financial impact would be Rs 20, 000 crore (the Armed Forces officers would
have benefitted by about Rs 1671 crore). A 3 Judge Bench of the Hon’ble Court
on 4th September 2012, did not find any reason to
modify/recall/re-hear the decision. Entitled Armed Forces officers were paid
arrears but the matter whether the interpretation of the Court’s order and
implementation by MoD was correct is sub-judice in Contempt Petition (Civil) No.
328 of 2013 to be heard next on 18th August 2015.
Hope you will publish this too.
