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.
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.
I am not sure whether you (or your research assistants) had the time to go to the PCDA (P) website, but if you (or your research assistants) did not please do so at pcdapension.nic.in/. Once there please go to the drop down menu Armed Forces Pensioners/Family Pensioners. Once there do take the time to peruse Circular No. 500 : Implementation of the Govt. decision on the recommendations of Committee on the issue related to Defence Service personnel and Ex-Servicemen – Minimum guaranteed pension to Pre-2006 Commissioned Officers / Family Pensioners and Circular No. 502 : Implementation of Government decision on the recommendations of the Committee of Secretaries - 2012 on the issues related to Defence Service Personnel and Ex-Servicemen- Enhancement of Ordinary Family Pension in respect of Pre-2006 JCOs/ORs Family Pensioners.
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
www.indianarmyveterans.gov.in/view_file.php?fid=47Subject. TERMS AND CONDITIONS OF SERVICE ..... Auth: Govt of India, Min of Def Letter No 15(1)/83/D(AG) dated 28 Jul 1984 amended
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.