1. Column: Rational Expectations: Short step from OROP to Greece

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

By: | Published: July 16, 2015 12:29 AM
EPF scheme, epfo, EPF scheme epfo, nps, new pension scheme, workers pension, Employees Provident Fund Organisation, arun jaitley, arun jaitley on pensions, jobs news

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-a-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.

sunil.jain@expressindia.com

  1. S
    Sunlit
    Jul 17, 2015 at 2:00 pm
    "OROP-type demands spiral"; "If this is now demanded by teachers, babus, paramilitary forces and the police": The w article is based on alarmist reasoning of that nature and the inadequacies of the research it is based on are a bit obvious. When OROP is based on truncation of career span of a person in uniform of the armed forces as compared to the retirement age of 60 years applicable to civilian government employees, what possible basis would there be for these imaginary spirals and demands? No truncated career and no steep cadre pyramids in civilian employee cadres means no justification for raising copy-cat OROP demands.
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      BhaiJi
      Aug 28, 2015 at 11:15 pm
      How about finding another job like your other countrymen who you so proudly claim to be protecting. I am sure with all the training you guys get it should be easy. Remember ours is not a rich country. Stop being sbags. Jai JHind.
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        Ashok Chhibbar
        Jul 16, 2015 at 8:08 pm
        An ignoramus trying to misunderstand the issue of OROP!
        Reply
        1. H
          Hurt Indian
          Jul 21, 2015 at 8:20 pm
          It is a shamefully illogical and factually incorrect article. Pity that Financial Express employs him. Let
          Reply
          1. A
            ajaya
            Jul 18, 2015 at 10:53 am
            Mr Jain, you are either lying or lazy. Former because your facts are half truths. Later because numbers are not backed by research. This post is alarmist and apparently at the beheast of motivated parties. The civil side, esp offrs, already have an orop like architecture and thst too even before retiring. when Non-Functional Upgradation (NFU) was introduced for Organised Group A Civil Services. The said scheme provides that all officers of such civil services, if otherwise eligible, shall be granted the higher pay of promotional grades, even if they are not promoted. Hence, by default, officers who are unable to be promoted in their cadres are now retiring with the pay of an Additional Secretary to Govt of India (HAG) which results in (almost) de facto OROP. While 1 in 100 gets to be Maj Gen, all on the civil side get to that pay before retirement, thus pension.This concept of NFU has been denied to the defence services but remains applicable to civil officers working shoulder to shoulder even under the Ministry of Defence. For example, today, a Chief Engineer (CE) of the Military Engineering Services who may be a military officer of the rank of Brigadier may have his Civilian Superintending Engineer (SE) who would be serving under him, drawing the pay of a Lieutenant General under NFU and hence also the pension of a Lt Gen. So the boss gets a lower pay and pension than his subordinate!
            Reply
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              ajaya
              Jul 18, 2015 at 10:49 am
              Mr Jain, you are either lying or lazy. Former coz your facts are half truths or later as your research is half baked. The civil side already enjoys the benefits of orop like architecture and that too before retirement. when Non-Functional Upgradation (NFU) was introduced for Organised Group A Civil Services. The said scheme provides that all officers of such civil services, if otherwise eligible, shall be granted the higher pay of promotional grades, even if they are not promoted. Hence, by default, officers who are unable to be promoted in their cadres are now retiring with the pay of an Additional Secretary to Govt of India (HAG) which results in (almost) de facto OROP. Where 1 in 100 offrs from services would get the rank of maj Gen , all on the civil side would. This concept of NFU has been denied to the defence services but remains applicable to civil officers working shoulder to shoulder even under the Ministry of Defence. For example, today, a Chief Engineer (CE) of the Military Engineering Services who may be a military officer of the rank of Brigadier may have his Civilian Superintending Engineer (SE) who would be serving under him, drawing the pay of a Lieutenant General under NFU and hence also the pension of a Lt Gen. So the boss gets a lower pay and pension than his subordinate!
              Reply
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                Ashutosh
                Jul 25, 2015 at 6:24 pm
                Financial Express should be ashamed of publishing this article. NOT because this is against OROP but it shows the lack of knowledge of the writer. He does NOT even know the definition of OROP, does not want to understand the rationale and is throwing just figures. It is best that MR. SUNIL JAIN educate himself and FE publish write ups from level headed people. Otherwise it will not be long before it will be in trash cans alone.
                Reply
                1. b
                  baniya_hater
                  Jul 19, 2015 at 10:05 pm
                  you seriously need to be sent to tololing peak for a few weeks this winter. when your nether freezes and you are gasping for breath your economic brain will regain clarity that your air conditioned office has robbed you off!!
                  Reply
                  1. M
                    munimji
                    Jul 18, 2015 at 8:31 pm
                    1.2 times GDP!!!!!?????? how did you p your arithmetic exams and learn economics??
                    Reply
                    1. M
                      Mahmud Ghazni
                      Jul 16, 2015 at 3:06 pm
                      As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages. 1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP
                      Reply
                      1. M
                        Mahmud Ghazni
                        Jul 16, 2015 at 3:06 pm
                        As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages. 1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP 2. Common sense. Part 1. There are always more dead people than alive, and more retired people than serving. So, What about the corpus funding the pension accounts of those who have ped on? where are those funds? Why arent they used to fund present pensioners?
                        Reply
                        1. M
                          Mahmud Ghazni
                          Jul 16, 2015 at 12:21 pm
                          As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages. 1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP 2. Common sense. Part 1. There are always more dead people than alive, and more retired people than serving. So, What about the corpus funding the pension accounts of those who have ped on? where are those funds? Why arent they used to fund present pensioners? 3. The life expectancy of a civilian employee is more than that of a defence employee, says these reports: and 4. If you want to take things unemotionally, then answer me this: How much money will you take to die for your postman, or give an eye for your vegetable vendor, or part of your face for that news reader on TV. Lets put a cost on your body parts, so we know your "value" and can evaluate whether to pay you for your parts or not when you are no longer capable(which should be very soon from the signs). Dont ever forget that the pensioners demanding OROP are all people who have spent their entire productive years committed to die for the same people I mentioned above, and ironically, you too.
                          Reply
                          1. M
                            Mahmud Ghazni
                            Jul 16, 2015 at 3:04 pm
                            As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages. 1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP 2. Common sense. Part 1. There are always more dead people than alive, and more retired people than serving. So, What about the corpus funding the pension accounts of those who have ped on? where are those funds? Why arent they used to fund present pensioners? 3. The life expectancy of a civilian employee is more than that of a defence employee, says these reports: and 4. If you want to take things unemotionally, then answer me this: How much money will you take to die for your postman, or give an eye for your vegetable vendor, or part of your face for that news reader on TV. Lets put a cost on your body parts, so we know your "value" and can evaluate whether to pay you for your parts or not when you are no longer capable(which should be very soon from the signs). Dont ever forget that the pensioners demanding OROP are all people who have spent their entire productive years committed to die for the same people I mentioned above, and ironically, you too.
                            Reply
                            1. M
                              Mahmud Ghazni
                              Jul 16, 2015 at 3:05 pm
                              As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages. 1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP 2. Common sense. Part 1. There are always more dead people than alive, and more retired people than serving. So, What about the corpus funding the pension accounts of those who have ped on? where are those funds? Why arent they used to fund present pensioners? 3. The life expectancy of a civilian employee is more than that of a defence employee, says these reports: h t t p :/ / w w w .the hindu . com/2005/12/29/stories/2005122904610900.htm and h t t p : / / reportmysignalpm.blogspot/2013/07/life-expectancy-of-soldier-less-than . html 4. If you want to take things unemotionally, then answer me this: How much money will you take to die for your postman, or give an eye for your vegetable vendor, or part of your face for that news reader on TV. Lets put a cost on your body parts, so we know your "value" and can evaluate whether to pay you for your parts or not when you are no longer capable(which should be very soon from the signs). Dont ever forget that the pensioners demanding OROP are all people who have spent their entire productive years committed to die for the same people I mentioned above, and ironically, you too.
                              Reply
                              1. M
                                Mahmud Ghazni
                                Jul 16, 2015 at 3:05 pm
                                As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages. 1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP 2. Common sense. Part 1. There are always more dead people than alive, and more retired people than serving. So, What about the corpus funding the pension accounts of those who have ped on? where are those funds? Why arent they used to fund present pensioners? 3. The life expectancy of a civilian employee is more than that of a defence employee, says these reports: h t t p :/ / w w w .thehindu/2005/12/29/stories/2005122904610900.htm and h t t p : / / reportmysignalpm.blogspot/2013/07/life-expectancy-of-soldier-less-than 4. If you want to take things unemotionally, then answer me this: How much money will you take to die for your postman, or give an eye for your vegetable vendor, or part of your face for that news reader on TV. Lets put a cost on your body parts, so we know your "value" and can evaluate whether to pay you for your parts or not when you are no longer capable(which should be very soon from the signs). Dont ever forget that the pensioners demanding OROP are all people who have spent their entire productive years committed to die for the same people I mentioned above, and ironically, you too.
                                Reply
                                1. M
                                  Mahmud Ghazni
                                  Jul 16, 2015 at 3:09 pm
                                  First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. Your value must be 1.2% OF GDP
                                  Reply
                                  1. M
                                    Mahmud Ghazni
                                    Jul 16, 2015 at 3:09 pm
                                    If you want to take things unemotionally, then answer me this: How much money will you take to die for your postman, or give an eye for your vegetable vendor, or part of your face for that news reader on TV. Lets put a cost on your body parts, so we know your "value" and can evaluate whether to pay you for your parts or not when you are no longer capable(which should be very soon from the signs). Dont ever forget that the pensioners demanding OROP are all people who have spent their entire productive years committed to die for the same people I mentioned above, and ironically, you too.
                                    Reply
                                    1. M
                                      Mahmud Ghazni
                                      Jul 17, 2015 at 10:53 am
                                      Sir, you are looking at OROP as an investment? Please wake up. It is a DEBT that is owed by the GOI to the veterans since 1973. Please calculate the interest the GOI owes the veterans, and the profit stolen from the veterans pensions by the babus since 1973, then understand why the GOI should implement OROP immediately, in order to prevent un-necessary litigation and further debt to the people who commit their bodies so specimens such as you can continue to exist.
                                      Reply
                                      1. M
                                        Mahmud Ghazni
                                        Jul 16, 2015 at 3:03 pm
                                        You are gutless to even show the comments that people write about your articles. What gives you the right to decide or judge on the fates of other peoples finance? Can you even look at yourself in the mirror every morning? Do you see the truth there, or is your reflection a picture of Donald Trump? You are a fake, Financial express and Mr. Sunil Jain. Sad that you have reached this level
                                        Reply
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                                          Boyina Kameswararao
                                          Jul 16, 2015 at 6:21 pm
                                          And that is not the case with civilians they retire at the age of SIXTY and their life span after retirement is less when compared to their defence counter parts and that is why civil pensioners are less than the serving. This simple thing you chose not to mention.
                                          Reply
                                          1. B
                                            Boyina Kameswararao
                                            Jul 16, 2015 at 5:48 pm
                                            Any one who is writing about defence ries and pensions should have at lease 5 years of experience as soldier in the hard living area with out family. We [the defence personnel] don't analyze all these things while discharging our duties. Your are worried that defence pensioners are 7 times more than the serving. Instead of retiring them at an younger age kill them then the pensioners will be quite less. Thus you can save a lot money which can utilised for discounts for corporates and subsidy to canteen facilities of legislatures and those who are in higher echelon.
                                            Reply
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