Time for a Pension Fund

By Prem Shankar Jha

Thirtytwo months ago, the National Democratic Alliance inherited a government with an utterly bankrupt treasury. The outgoing United Front Government had gone on a spending spree that had few parallels in the history of democracy. Faced with a chronic consolidated fiscal deficit of more than 8 per cent of the GDP it had not merely accepted the recommendations of the Fifth Pay Commission for an approximate 40 per cent hike in salaries and pensions, but then added another 30 per cent to it under the guise of setting right various errors and omissions in the Commission's calculations. As a result, the Centre's outgo on salaries alone rose by 76 per cent in the next two years.

The real damage that the UF did was not, however, to the Centre but to the States. The Centre employs only 3.8 million employees. The States employ the other 15.3 million. Even after setting aside the employees of the public enterprises there were still 13 million employees whose salaries would have to be raised in equal proportion to those of the Central Government employees. When this was done it would bankrupt the Indian State. The Pay Commission was aware of this. Its members had to adhere to their terms of reference and calculate exactly how much salaries and pensions had to be raised to offset the rise in cost of living. But they strongly advised the Centre to raise the retirement age by two years and reduce the size of the bureaucracy by 30 per cent over the next ten years. The former would have postponed the payment of retirement benefits by two years, and thereby cushioned the shock of the salary increases. The latter could be done simply by not replacing those who retired from Government every year. The UF did neither. When the Government made some tentative noises about raising the retirement age, it was inundated by a spate of letters from lower level Central Government employees organised by the Left Front, voicing stiff opposition to being forced to stay in Government a day longer than the age of 58. As for not replacing the superannuated, not only did the UF not promise any such action, but it committed itself to filling all the 3.75 lakh vacancies that then existed in the Central Government.

Worst of all, it did all this without once asking itself what effect this would have on the finances of the State governments. When this question was raised during the Economic Editors' Conference in 1997, a bureaucrat-minion of Mr. P. Chidambaram's blandly brushed the issue aside saying, ``That is a problem for the State governments to handle. They do not have to follow the Centre's lead.'' In an interview he gave to a business daily, after the Government accepted all the Central Government employees' demands in September 1997, Dr. Suresh Tendulkar, the economist-member of the Pay Commission, called the UF's action suicidal.

One of the first things the Vajpayee Government did on coming to power in 1998 was to raise the retirement age to 60. But it did this as a knee jerk reaction to the appalling state in which Mr. Yashwant Sinha found the treasury. Its only purpose was to make it possible for Mr. Sinha to give the impression that he was going to reduce the fiscal deficit in 1998-99 without having to ask his fractious allies in the NDA to take a few difficult decisions. Neither he nor his many advisers in Government paused a moment to ask themselves how best this savings ought to be used and whether there was any alternative to simply reducing for two brief years, the size of the hole in the Government's bucket. As a result the 'savings', amounting to around Rs. 5,000 crores a year, simply disappeared in the general budget. Despite these, the fiscal deficit continued to rise from 4.8 per cent in 1997-98 by the Finance Ministry's carefully doctored estimates, to 5 per cent in 1998-99, and higher still in 1999-2000.

In 2000-01 the pigeons are coming home to roost. So lavish had the UF been with pension increases that despite the increase in retirement age, the pension bill had gone up by Rs. 3,176 crores in 1998-99, and by Rs. 4,247 crores in 1999-2000, against an annual increase before the pay hikes of Rs. 1,880 crores. By 2000-01 the effect on the pensions of existing pensioners had been absorbed, but the flood of new pensioners was about to hit the market. Despite that, in a brazen attempt to show a decline in fiscal deficit to 5.1 per cent of the GDP, the babus in the Finance Ministry estimated that pension and retirement payments would rise by only Rs. 1,540 crores. In fact, they are rising by over Rs. 6,500 crores, and even that may turn out to be an underestimate. What makes this short-sighted legerdemain all the more galling is that the Government has let slip an invaluable opportunity to rid itself of most if not all of the burden of pension and retirement benefits forever. Instead of 'losing' the money saved by raising the retirement age in the general budget, if the Government had created an autonomous, protected pension fund, and had it raised the retirement age by not two but four, or even five, it could have built a pension fund large enough to meet the bulk of the resumed retirement benefits in the sixth year from the investment income of the fund.

Today, having reacted in a knee-jerk manner once, the Government is about to do so again. Instead of working out how best to set up a permanent self-financing pension fund that will rid the Central and State governments of the burden of financing retirement benefits from general revenues, the Finance Ministry is once again looking for gimmicks that might hold the fiscal deficit down to the 5.1 per cent that was promised by Mr. Sinha to Parliament last February. And in an exquisite irony, one of the proposals being touted a round by unidentified ministry officials is to push the retirement age back to 58. Such gimmicks, even if the Cabinet could be made to accept them, would only make the Government's pension burden worse.

Indians are living longer and bureaucrats are no exception. When the present pension system was formulated, retirees lived for an average of 11.3 years after they left service. Today they are living for an average of 18 years. Every country in the world is facing this problem. Germany and Scandinavia have brought down social security costs by raising the retirement age, as has Britain. France tried to do this for public sector workers in 1995-96 but had to back down before its powerful transport unions. To think that doing the opposite will save money is, quite simply, illiterate.

If the Government seriously wants to reduce the fiscal deficit by cutting down the crippling salaries and pensions bill, it would do well to follow the example of the industrialised countries, place all provident fund contributions in an autonomous, professionally managed social security fund, allow it to be invested in ways that combine safety with high returns and use these, and these alone, to pay future retirement and old age benefits.

Insisting on adhering to a clumsy makeshift system that the British fashioned to meet the needs of a bureaucracy of a few thousand persons more than a hundred years ago is not only mindless: it is the best proof of our continuing mental enslavement half a century after the British have departed.

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