‘Progressive taxation should be attempted on the top 10% of people who own 72% of the wealth’ | Photo Credit: Getty Images
The demand for the Old Pension Scheme (OPS) is increasing especially after some states announced that they will be re-introducing it. The main stream of OPS focuses on the preconceived notion of inefficiency and the principle of fiscal deficit. Nevertheless, there is a need to separate the consequences of OPS from the neoliberal system and examine the policy from a class and welfare perspective.
In line with the spirit of the National Pension System (NPS), the Sixth Pay Commission had substantially increased the basic pay of government employees to cover pension contributions and promote savings for post-retirement expenses. The basic monthly salary of a Class 4 employee (7th pay scale) is ₹25,000. The World Inequality Report 2022 estimates that the bottom 50% of the population has an average monthly income of ₹4,468, compared to ₹14,669.7 for the middle 40% (6th to 9th decile). The salary of a government employee exceeds the income of more than 90% of the population. Thus, OPS acts as a regressive redistributive mechanism in favor of a better-off class. The minimum pension of a government employee is ₹9,000 (6th pay scale). Whereas, in 14 states the social security pension set by the supervisory bureaucracy does not exceed ₹500; In some states this amount is ₹ 2,000.
rising pension liabilities
The government’s pension liabilities increased due to the substantial increase under the 6th Pay Matrix as it was politically difficult for existing employees to withdraw OPS when NPS was introduced. As a result, pension liabilities increased to 9% of the state’s total expenditure, and are expected to increase in the future. The pension liabilities of the states are 1.2% of GDP by 2021-22. From 2004 to 2019, states registered an average annual growth of 16% in pension spending, while overall spending growth stood at 12.8%. There was an average growth of only 13.41% in the total receipts of the State Governments. Assuming this rate remains constant, the share of pension expenditure will be 14.7% of total state expenditure by 2040 and 19.4% by 2050.
the burden falls on the dependents
Several state governments are yet to implement the seventh pay norm, while some states have reportedly not cleared sixth pay dues. In a neoliberal framework, governments, especially at the state level, do not have financial autonomy. Currently, the bottom 50% of the population bears an unjustified burden of indirect taxation of over six times their income. Due to OPS, the bottom of the pyramid population with very low monthly income as compared to government employees have to bear the burden of incubus which will push them into destitution and poverty.
The average age of the Indian population is approaching 30 years, and the population structure in many states will become outdated in the next two to three decades. Public provision of education and health care is indispensable to exploit the demographic dividend. However, there is a need for more human resources in both these areas. Recruiting with OPS addresses the challenges of expenditure to provide public goods, leaving a large population deprived of basic necessities. Therefore, OPS forces governments to reduce already low social sector spending, thus pushing the marginalized to the bottom of poverty.
OPS facilitates the monopoly of future labor markets in the private sector by this proprietary class. Historical experience in post-independence India confirms these trends, where sophistry and hardline socialist rhetoric were used by the supervisory bureaucracy to strengthen its position and emerge as a dominant ownership class. In a developing country with highly unequal income distribution, a democratically elected government should focus on redistributing resources to improve the living conditions of the poor.
Resource distribution should be equitable
Opposition to OPS should not be a weapon to reduce government but to argue for a more equitable distribution of resources and the expansion of universal provision of public goods. A participating pension for government employees would provide a more egalitarian outcome in an economy with sharp income inequality. To protect employees (especially those at the bottom of the hierarchy) from market vagaries, the government may tweak the NPS to provide guaranteed monthly returns. Administrative reforms are needed to address the disparity in pay among different ranks of employees.
Disillusionment with neoliberalism is the primary reason for the strong demand for OPS. Government employees as a group who have a voice and easy access to decision making can band together to rationalize pensions and extravagance of political officers, which is a huge burden on the exchequer. They can have influence to push for progressive taxation of the top 10% (who own 72% of the wealth) to address poverty and rising inequality. Such policy measures are inevitable when children under the age of five die due to widespread starvation, and 229 million are still poor.
Gaurishankar S Hiremath teaches economics at IIT Kharagpur. Harikrishnan KS is Senior Research Fellow, University Grants Commission, IIT Kharagpur