During my recent travel to India, I visited three major cities, New Delhi, Ahmedabad, and Varanasi. Having spent considerable time in each of these cities, I was able to see the strength of India’s economic recovery - in the markets, in restaurants, and during conversations with various people. There was a sense of optimism, and if probed, even recognition of the pain due to the pandemic.
Prior pain had been replaced by optimism about the future and this was the key takeaway for me on this visit. Needless to say that I was still pretty much in India during the pandemic - including the two waves and my relocation due to my doctoral studies happening only in late 2021. Therefore, I could relate to the sense of uncertainty and the subsequent pain that people experienced.
Based on these conversations and a whole lot of exciting developments excluding some who were laid off in the tech sector over the last year, I was surprised at the mainstream narrative that has fed into rationalizing the pivot to the Old Pension Scheme.
To cut the long story short, the arguments in support of the Old Pension Scheme are namely two -
There is obvious economic pain. Old Pension Scheme widens the social security net.
There is excessive inflation and Old Pension Scheme will help households fight inflation.
Both of these arguments are flawed and untrue. First, even if there exists some economic pain, the Old Pension Scheme benefits government employees. Government employees are obviously not those who were in any kind of economic pain during the pandemic. They did not see a decline in their wage or lost their jobs. It was the private sector, in particular the contact services that saw the maximum pain during the pandemic.
It is therefore absurd that a fiscal transfer of resources is being made from all non-government employees to government employees.
On the second point, inflation through the last year has been high across the world owing to a variety of factors. India’s inflation has been moderating for the last few months and now it is well within the RBI’s 2-6% range. However, even if the objective of the OPS was to cushion against inflation then the OPS covers only government employees and leaves the poor and vulnerable who would otherwise be genuinely impacted by inflation (to some extent the extremely poor are cushioned due to subsidized food grains).
Clearly, the OPS does not meet the intended objectives that have been cited to justify its introduction. It is a mere attempt to redirect fiscal resources towards government employees in the long run, which leaves limited funds for the provisioning of public goods. This at a time when Indian states provide very limited public goods means that the quality of public goods would further fall - even as effective tax rates may have to be hiked. All in all, everyone will eventually be worse off, including government employees. Those who do not realize this now may be forced to learn this economic lesson the hard way in a few years.
But what is the OPS?
The Old Pension Scheme is essentially a Pay as You Go scheme. That is, under a Pay as You Go scheme, the government will collect pension contributions from present employees and pay to exist retired pensioners. This will work as long as we have more government employees contributing to the pension program than the recipients of the benefits.
In contrast, under a fully funded pension plan, the past contributions of existing pensioners are used and invested to provide retirement benefits to the beneficiaries.
India’s demographic transition towards a gradually older society will therefore pose a challenge for the Pay As You Go scheme. Moreover, the increasing liabilities in the form of salaries and pensions will restrict the fiscal space for the government to spend on providing better schools, roads, and other public goods.
Eventually, state governments will have to borrow or increase taxes to pay for the increase in pension outlays on existing government employees. Borrowing will lead to all sorts of debt financing issues potentially deteriorating the balance sheet of the state governments while higher taxes will eventually increase the tax burden on citizens without providing any improvement in the quality of public goods.
It is therefore not surprising that there is so much backlash against the pivot to the Old Pension Scheme. Here is hoping that sound economic rationale prevails and prevents further state governments in India to adopt the Old Pension Scheme as an outcome of competitive populism - which will invariably lead to a race to the bottom.
As the saying goes, “Road to hell, is paved with good intentions.” To add to it, the age-old economic saying “There are no free lunches.”