Often while travelling through Delhi roads, one notices an autorickshaw sporting a wise crack. The one that seems most apposite for the moment, as the UPA government stumbles at getting any of the key Bills passed, is, waqt se pehle aur muqaddar ke aage kisi ko kucch nahin milta (before the right time and destiny, nothing will come to fruition).
Possibly the Pension Bill has neither reached its time nor destiny to pass the Parliament gauntlet, despite being in the works for eight years. It does not really matter who decides to play spoilsport, but this Bill has earned an uncanny ability to get a filibuster.
Yet right now we should join those to collectively hope the Bill does not go through with the amendments proposed. Because if the Bill does get passed, it will create a pension sector that could be worse than the problems we had set out to solve.
The Centre had woken to a time-bomb in the pension plan for government employees in 2001-02 when the pension liability had reached R15,000 crore. This was just after the Fifth Pay Commission award. Based on the numbers then, actuarial calculations showed the pension cost of states and the Centre would reach more than
1.5% of the GDP by the end of the decade. In 2011-12, the total is slightly more than that.
Since the expenditure does not get financed from any matching savings but is a draw on the current revenues earned by the government, it was one more reason why deficits had begun to rise. But what most of the MPs do not bother to remember is that, as grim as this forecast was, the Pension Bill was not created to fob off this responsibility. (For the left and ultra left like Mamata, this is rather a pious responsibility.)
Instead, at the same time, the ministry of social justice and empowerment conducted a study to reckon if a pension system could be created for the unorganised sector workers. The study, referred to as Oasis Report, created the vision for such a scheme. By the beginning of this century, the World Bank had found out that as the population of every country began to age,
unfunded pension liabilities were becoming a big draw on government and company finances.
The study threw up two conclusions. At one level, the Centre?s budget was getting rapidly depleted to finance the pension bill of its retiring staff, and, at the other level, there was no money available to finance a pension scheme for the 400 million unorganised sector workers, including farmers and landless labourers. The solution meant finding a source of capital creation that would finance both. The obvious answer was the capital market, including both equity and debt capital.
Since pension money stays invested for a long time (about 30 years) in whatever instrument it is deployed in, the usual business cycle vagaries of the market get evened out. It only remained to develop the details of the pension market which would be done by the passage of the Bill setting up a regulator for the sector. Going by what happened on Wednesday, we have not moved beyond the first principles between 2001-02 and now, a full decade later.
While Mamata Banerjee is most explicit in voicing her opposition to the Bill, a good percentage of the BJP and the Congress members are equally convinced that pension is something that must be assured and not left to the ?bad? markets.
Omitting the amendment to introduce a cap of 26% foreign investment in pension funds, the more pernicious plan that is getting firmed up is to (a) allow for minimum
guaranteed returns and (b) ensure that the pension architecture is built where the entire money of the subscribers is invested only in government bonds. Before we say impossible, just look at the combined state and central government finances.
In 2011-12, the two together have issued R4,75,641 crore (net) of bonds to finance their deficits. The bonds are subscribed to by all types of financial institutions, including the seven pension funds that have got the licence to do business.
The pension funds now service a universe of 2.4 million people with a corpus of only R8,585 crore as on March 31, 2011. If this scales up to even 100 million people, all demanding a risk-less plan, the amount of government bonds they will need to buy will be R3,58,000 crore a year. Will the banks, insurance companies and even the favourite of the pension Luddites, EPFO, then invest abroad? Else to meet the demand for government debt, the finance ministry will have to create a synthetic deficit to feed the pension ogre. To service the consequent interest bill, it will have to raise taxes heftily. There is no free lunch in a society, not even through the Food Security Act. What the new BJP and the old left (Trinamool Congress) have dug in for therefore makes a mockery of the pension plan.
If the current pay-as-you-go structure for civil servants who have joined service before January 1, 2004, means trouble for the government, a synthetic debt can be worse.
The new pension scheme will be tantamount to asking the government to create an old age security scheme for the entire country on government revenues. Higher taxes will be the only way to finance the drain.
The rationale for the pension reforms is to channel the money raised into long-term infrastructure spend, either as equity or debt. That is how societies raise funds to finance their future. Yet keeping the money parked in government securities will only serve a vicious circle where we will pay larger and larger taxes to service our future pension, while suffering broken roads, bankrupt power companies and scarce water. All this while India has a young population that can afford the long-term investment in infrastructure through pension and insurance funds. But we are ready to fritter away that demographic dividend through imagined scares.
subhomoy.bhattacharjee@expressindia.com
