Pension the idea

Updated: Nov 21 2005, 05:30am hrs
The decision to offer a pension scheme with an assured return goes against the very spirit of pension reform, begun to get out of the open-ended liability imposed by a defined-benefit scheme. The lessons learnt during the US-64 fiasco, when the implicit offer of assured returns boomeranged so badly, have been forgotten. For, what the government is contemplating is very similar. If this is the price for getting the Left on board, it is just not worth it. The government must make the Left parties understand that it has no bottomless bowl from where it can pay pensions.

The rationale of pension reform and the decision to shift from a defined benefit scheme to a defined contribution one is essentially to have some check on pension liabilities. The former (where the government is committed to pay a specific sum to all its pensioners), coupled with growing longevity, has resulted in liabilities ballooning to unmanageable proportions. The recent study by Invest India Economic Foundation says the pension cover for only civilian employees of the central and state governments comes to 55% of Indias GDP. Clearly, this is unsustainable.

The new scheme is a desperate, if belated, try to stem the haemorrhage. Unlike now, where pensions of government employees are a charge on state revenues, subscribers in the new scheme have to contribute to a Pension Fund. Their accumulations will then be invested in alternate schemes, with the earnings paid in the form of pension. The Bill has been opposed by Left parties, apprehensive that the benefits will not compare with those offered under the present one. While the relative merits of the two are debatable, the bottomline is that the government is not in a position to honour its obligations. So, the choice is between some pension today and no pension tomorrow.

Given this, it is imperative to have a sustainable system. Yes, in a country with no social security, some assurance of a minimum pension will make the new scheme more palatable. But, not by a government guarantee: use a market-based insurance mechanism like a Pension Benefit Guarantee Corporation, with the premium linked to underlying risk.