Retirement solutions

The Indian Express, July 21, 2006

- Ila Patnaik

After the Cabinet gave its approval to the terms of reference of the

Sixth Pay Commission to review salaries and pension benefits,

government employees all over the country will have something to cheer

about. What is perhaps not appreciated is the extent to which they

have the new structure of pensions in government to thank for in the

willingness of the government to go ahead with the pay commission and in

what may likely be decent salary improvements. Thanks to the move from

a defined benefit to a defined contribution system under the new

pension scheme, the financial burden of another pay commission is a

little less daunting than that of previous pay commissions. It is partly on

account of this that despite the large deficits and enormous welfare

spending programmes of the UPA, the government may be able to provide

government employees a fair deal.

When the recommendations of the fifth pay commission were implemented

the impact on central government finances was estimated to be Rs 3,500

crore per year. The expenditure impact for all state governments taken

together was about 1.5 times that for the centre. The total increase

in expenditure on salaries and pensions of the employees of the

Central Government, State governments and autonomous bodies has been

estimated to be to the tune of Rs 14,000 crore.

The fiscal impact of the sixth pay commission could be upto 25,000

crore. However, while the pay commission would review salaries and

pensions of all exising government employees, one chunk that would be

out of it would be central government employees who have joined

service after January 1, 2004 and are now part of the defined

contribution New Pension Scheme. Their pension benefits are not

"defined benefits" and will not be fixed by the pay commission. Under

the NPS every employee contributes 10 percent of his salary and DA. A

matching contribution is made by the government. In the context of the

sixth pay commission this means that the total financial burden of

government obligations for pensions revisions by the sixth pay

commission will be limited to the older employees of the

government. By 2010 when the pay commission recommendations may be

implemented there would be approximately 1 million employees who are in

the defined contribution system and no longer pose a financial burden

to the government. Considering the finacial constraints every

goverment faces, and this government faces more than any other, this

important fact will allow a greater scope for salary improvement than

if their pension burden had to be borne by the government.

The benefits of the adopting the new pension scheme will accrue not

only to the centre but also to the 16 states who have joined the

NPS. The exising burden of pensions on state finances is already very

high. Uttar Pradesh spent Rs.4143.3 crore in 2004-05 as pension

payments. This constituted 75 percent of its revenue deficit. Andhra

Pradesh spent Rs.3071 crore. Maharashtra spent Rs.2731 crore, while

West Bengal spent Rs.2914 crore. In terms of the net present value of

future payments, the two states with the biggest problem on pensions

are Maharashtra and West Bengal.

All states taken together paid Rs.39,370 crore as pension

payments. The burden of payments grew sharply in 1993 to 2003 at the

rate of 23 percent, faster than the rate of growth of total revenues,

own revenues and total expenditures. Pension payments to state

employees have been eating significantly into state developmental

expenditure which declined from 68 percent to 54 percent of total

state expenditure in the last twenty years, as pension payments rose

from 5 percent to 9 percent.

When pension liablities in Andhra Pradesh rose manyfold from Rs 330

crore in 1990-91 to Rs.2321 crore in 2001-02, it chose to join the new

pension system. Himachal Pradesh issued orders for new recruits being

part of the NPS in March 2003 and Tamil Nadu in May 2003, even before

the Central government did so in August 2003. Chhattisgarh joined on

November 1, 2004, Jharkhand on December 1, 2004, Manipur on January 1,

2005, Madhya Pradesh on January 1, 2005, Assam on February 1, 2005,

Gujarat on April 1, 2005, Goa on August 5, 2005, Uttar Pradesh on

April 1, 2005, Uttaranchal on October 1, 2005, Orissa on September 17,

2005, and Maharashtra in 2005.

All other states, with the exception of West Bengal which has taken an

explicit decision not to join, are considering joining the new scheme.

These states will now reap the benefits of having joined the new

scheme. They already have significant number of employees who are in

the new system. Rajasthan today has 37,000 new recruits of the state

government are now members of the New Pension Scheme. The Rajasthan

government had announced it would join the the NPS of the Government

of India on Jan 1, 2004. Maharashtra has about 24,000 new employees

who are in the NPS. Tamil Nadu has 10,670 employees in the scheme. New

entrants like Goa have 1,162 state government employees and a hundred

school teachers in the NPS, while Madhya Pradesh has 2108, Orissa 260,

Gujarat 250 and Uttaranchal 500. It is estimated that there are a

total of 500,000 employees of the central and state governments and

autonomous bodies who are already members of the NPS.

The Left, primarily for ideological reasons, has been trying to stall

the NPS and push for all government employees being put back into a

defined benefit system. Not only will this mean that the new recruits

of the NPS will lose out on the benefits and improved pensions they

would have been able to get under the new system, considering the

pension obligations that this will involve for them, it will impose

greater constraints on the pay commission when considering

improvements in government salaries. In the best interests of

government employees, it may be hoped that the Left will not succeed.


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