For a long time, commoners carried civil servants and pensioners on their shoulders. Much of the tax money he paid went toward the salaries and pensions of current and former civil servants. The 2004 New Year’s Pension Plan (now the National Pension System or NPS) was an attempt to free one of them, a future pensioner, a current civil servant, from the backs of the common man.
A recent effort seeks to put government workers back on the shoulders of ordinary citizens and to revive the old, unfunded pension system (OPS). Ironically. One of his strongest proponents of the old system he is the AAP, literally the party of the common people.
Away from NPS
Recipients love OPS. She will receive 50% of her last withdrawn salary as a pension, no deductions from her salary, and increased inflation protection through the regular Dearness Allowance (DA). If you’re lucky, your pension may even be revised upwards if the government decides.
But what about NPS? This is due to the 10% deduction from monthly salary, the lack of inflation protection, and most importantly the final salary which cannot be known in advance and is subject to the whims of financial market returns. means unlinked annuities. In addition, there is no provision for upward revision.
Some of the early NPS retirees, who chose the new system in their late 40s and early 50s, mostly have about 10 years of service and are paid very little.
Government jobs are only available to a small portion of the population, but the majority of voters who do not have government jobs are attracted to the benefits of OPS.
And does the government pay under the OPS? Currently, the state government pays pensions to retired employees under the OPS and employer contributions to current employees under the NPS. Returning to OPS eliminates the need for contributions from your employer and reduces your current spending.
However, this plagues the country’s finances when they retire and have no funds allocated for pension payments. So, in effect, you’re kicking the can. But OPS helps political parties win elections.Although government jobs are available to only a small portion of the population, the majority of voters who do not hold government jobs are attracted to the benefits.
Economic Times analysis shows that if all states switched to OPS, 40.5% of tax revenue (excluding federal transfer taxes/subsidies) would be required to pay pensions by fiscal year 2046-47 I understand. According to a study, 25% of all state tax revenues will go to pensions in the 2021-22 fiscal year, with Himachal Pradesh leading the list with a staggering 80%.
Invited by NPS
One million new staff members from the non-government sector were added to the NPS in FY2022-23, while civil servants clung to the OPS. This is a record, he said Businessline. NPS’s Assets Under Management (AUM) in Corporate and All Citizen Models increased by 29% and 31% respectively in FY2020-2023 to Rs.1,410 crore and Rs.
What attracts the non-government sector to NPS? The first attraction was the income tax deduction for donations. It now has the added advantage of superior earnings. NPS’s fund his manager said over the past decade he has achieved a return on equity of 12-13% and a return on debt of 8-9%, which his EPF/bank deposit rate and inflation rate is higher than
Additionally, NPS is now open to all adults under the age of 65 and affordable. Even day labourers and gig workers can maintain an NPS account by transferring at least 1,000 rupees annually. It also has portability to ensure competition, with multiple funds his manager to choose from, unlike employee provident funds.
spoiled a lot
Civil servants can get stable employment and regular pay through DA increases, annual salary increases, salary committee revisions, and promotions. Therefore, during their working lives themselves, they have ample opportunity to acquire assets and investments. So why should they be pampered in retirement with taxpayer-paid pensions? The usual answer is that pensions are salary deferrals. However, this argument has little basis as no deductions are made from salaries for the pension corpus.
Put another way, why should civil servants be excluded from pension contributions when even manual workers and food delivery workers must save a portion of their income to obtain a pension under the NPS? Should pensioners be paid out of the GST paid by day laborers and food delivery workers?
profit from compound interest
But what about lower pensions for early retirees under the NPS? Compound interest is the back end. If he invests 10,000 rupees monthly and he gets a 10% return, in 30 years he will have 20.8 billion rupees. However, in the tenth year and his twentieth year, Corpus is only Rs.200,000 and he is Rs.720,000 respectively. Only in the 23rd year does he reach Rs 100 crore, but in the remaining seven years he adds another Rs 108 crore.
And the return earned in year 30 alone (ignoring contribution) is more than the corpus at the end of year 9 (contribution + return)! Is not … Therefore, those who have worked for more than 30 years can expect a good pension.
India is a low middle income per capita country. But high inequality means that most people earn well below her per capita income. India is also set to overtake China as the most populous country this year, but has a much higher proportion of young people. Investments must be made to convert the productive potential of these young people into economic growth. Infrastructure and human capital are the foundations on which private sector investments are made. Therefore, such public goods must be provided by governments at subsidized rates or completely free of charge for everyone to benefit.Tax revenue is the only option
Next is climate change. Reducing extreme climate change losses and carbon emissions comes with huge expenditures, and here too, governments need to take the lead.
We also have to deal with a warlike and aggressive China. This means an increase in defense spending.
As such, tax revenue has a long list of high-priority uses, and pensions that benefit elite minorities are well below that list.
promise and delivery
One last word about shipping.
What impact will increased life expectancy have on pensions? A 30-year-old civil servant retiring at her 60 and dying at 75 means 30 years of salary and 15 of her pension payments. As life expectancy increases, the number of years of pension benefits may be equal to or longer than the number of years of salary benefits. Against this backdrop, how can unfunded defined benefit pension plans remain viable?
In a democracy, politicians must satisfy different segments of the population in order to be elected, and this forces them to make promises that tax revenues and borrowings cannot sustain. If his income and debt are 100 rupees, he must not fulfill his promise of 25 rupees to fulfill his promise of 125 rupees. There are many examples of such failures. So no one knows if an overly committed government will be able to pay pensions in a few decades.
(The author is a former banker and now teaches economics and finance.)