I was struggling to find a good topic to write on today, to the point that I considered skipping this week. That was until I read an article about the Indian Government introducing the so-called ‘Unified Pension Scheme’. The UPS is a positive development, as it reflects the Government’s acknowledgment of the unpopularity of its own policies.
The early 2000s marked the peak of neoliberal ‘reforms’, leading to the largest increase in income and wealth inequality in post-independence India. Many unpopular policies were implemented, partly under pressure from Bretton Woods institutions like the World Bank and the IMF, and among them was the ‘New Pension Scheme’.
The NPS was designed to channel the salaries of Government workers into financial markets to boost prices under the guise of ‘fiscal sustainability’. Government workers would ‘contribute’ part of their salary to the scheme, with the ‘choice’ to invest in stocks or bonds. In essence, it made pensions dependent on market returns and worker contributions. Therefore, if you joined Government service later in life, your pension would be lower because your ‘contribution’ was lower.
The UPS continues funneling public and Government workers’ money into the financial markets with it being ‘contributory’.
This part of the article I read on UPS was really frustrating:
Under the Old Pension Scheme (OPS), retired government employees received 50% of their last drawn salary as monthly pensions. The amount keeps increasing with the hike in the DA rates. OPS is not fiscally sustainable as it is not contributory, and the burden on the exchequer keeps mounting.
The Hindu/PTI
They present it as if OPS not being fiscally sustainable is an objective fact, like how ‘1+1=2’ is in mathematics. But there’s another way to look at it.
Consider a government worker who receives ₹15,000 a month in pension. The government claims this is ‘fiscally unsustainable’ and decides to cut it to ₹2,000 a month. Now, the worker can’t meet their basic expenses. What options do they have? If they have no one else to ask for money unconditionally, there’s no way for them to be ‘fiscally sustainable’ without continuously increasing their own debt burden. Eventually, they would have to default on their debt.
See how easily the ‘fiscal sustainability’ argument can be turned on its head?
But what if the Government can’t raise money through taxes?
The counter-argument made against this is that if the government increases spending, it will have to borrow or increase taxes. This is not true; a sovereign currency-issuing state does not need to issue debt to ‘fund’ its spending. Debt issuance merely swaps one asset, government money, for another, government bonds. I won’t go into more detail on this here, as I’ve covered it in more depth in my previous blogs.
When is a pension scheme actually ‘unsustainable’?
A pension scheme can only be truly considered unsustainable when the pension is so high that the aggregate demand for goods and services exceeds the economy’s capacity. It’s not when government deficits surpass an arbitrary percentage made up by neoliberal economists.
There are exceptions, of course. Non-sovereign governments, such as those in Eurozone countries or sub-national governments in India like state governments, face actual financial constraints in addition to real resource constraints. I’ve discussed this in more detail in my earlier blog here.
Pension contributions are unnecessary
Pension ‘contributions’ under UPS should be viewed as a tax—it doesn’t pay for your pension; it simply reduces your salary. The mainstream rhetoric that pensions must be contributory is completely wrong. Pensions can be made universal so that private sector workers, too, can benefit. For example, any person who has worked for at least x years could be eligible for y% of their salary, indexed with inflation. Even those who have never worked or cannot work could still receive a smaller universal income for life.
The Indian Government has finally done something positive for workers, even if it’s only for a small portion of them. This is a tacit acknowledgment of its own failures. The early 2000s neoliberal reforms led to the fall of the NDA government, which was replaced by a big-tent coalition of liberal and left parties in 2004.
The mid to late 2000s saw many good policies implemented, partly due to pressure from left parties in the coalition, the biggest among them being NREGS. It’s a shame that NPS wasn’t scrapped sooner.
That’s all.