People's Democracy

PENSION REFORM IN INDIA

Turning The Clock Back

N M Sundaram

THE statement of the union finance minister in the National Development Council meeting is misleading. He is reported to have said that by fiscal 2009-10, the joint liability of States and the Centre on account of pension alone was likely to be over a whopping Rs 1,00,000 crore. This remark is a crude attempt to alienate the employees from the public.

 He is further quoted as having said: “no country can afford the `pay-as-you-go' system which extended pension benefits over a 20-year period to all senior citizens.”(The Hindu, June 29, 2005). Certain facts relating to pension as being paid to government employees require to be clarified in their historical perspective.

First of all it is not a ‘pay-as-you-go’ scheme as the government would have the people believe. The simple fact is matching contribution that should otherwise have gone to the provident fund was not funded. Be that as it may there is nothing strange or imprudent to have a ‘pay-as-you-go’ scheme when one views it as a social security.  Many countries have this system.

PRIVATISATION OF PENSION FUNDS

India is trying to follow the American example where president Bush is trying to turn social security topsy-turvy by switching to individual private pension accounts, where payments would relate to market value of workers’ own contribution at the time of retirement from service instead of on the basis of guaranteed/defined benefits that was introduced as early as 1935 during the presidency of Franklin Roosevelt.

What is being attempted is privatisation of pensions; it is as simple as that - a corollary to implementation of neoliberal reforms. It is a diabolical attempt to funnel enormous pension funds into the unfathomable casino world of stock markets. It is simply acting as per the dictates of world finance capital.  The way the stock markets have gyrated, one can visualise the risks involved. One can only wonder at the temerity of the proponents of pension being turned into private funds related to individual contributions and their value at the time of retirement or cessation of service. This is part of a global conspiracy we are witnessing once again; a bizarre unfolding of a drama under the auspices of the dictated neoliberal economic policies.

EVOLUTION OF SOCIAL SECURITY

Historically, levels of social security came to be recognised as an important criterion among others, to distinguish whether the people in a country were mere subjects or citizens. There is considerable historical material to trace the metamorphosis that took place by which charity turned into a social responsibility of the State. It can be seen that the path of evolution of social security is not very much different from the one that democracy itself took over the years.

There is no evidence that people preferred social security doles to employment. There is no evidence either that provision of social security reduced savings. On the contrary, evidence in many countries shows there has been expansion of savings that followed pay-as-you-go system of financing social security. The biggest disincentive to savings in recent times is absence of profitable and safe investment avenues whose space has been encroached upon by the speculative arena of the stock markets. If investments are hampered, the government can always generate a budget surplus by a suitable taxation policy, providing incentives to savings and measured borrowing with an eye on targeted investment and employment generation.

State sponsored social security or pension schemes, unlike the private schemes required capitalisation. After the Second World War, this was the fundamental change that took place that State sponsored pensions were paid on the basis of the expected cost of pensions in the following few years, without long term funding as in the case of private pension schemes. A significant improvement was made around the 1950s that pension would be paid relative to the average of the better paying period of their working life rather than the average of their entire working life which would be low, though different approaches developed in this regard in different countries. But the general principle was the same namely that the pension payment should be as close as possible to the pay on retirement. Then came the principle of indexing of pension by linking pension to inflation through a defined formula. There were many other changes too like the retirement age or the qualifying period of service for entitlement to full pension.

INDIAN EXPERIENCE

In India, pension at least in so far as civil servants and military personnel are concerned has a strong historical continuity and foundation. The benefit was not gratuitous but in exchange for contributory provident fund. If its contribution was not funded it is not the fault of the employees. The government must admit this reality and tell the people the accumulations in the pension fund at least notionally. It is not a pay-as-you go scheme as the government would pretend and have the people believe. That was why the Pension Rules of 1972 included in the list of exclusions “persons entitled (that is opted) to the benefit of Contributory Provident Fund.”

It would be useful to refer to the principles enunciated in its justification in volume II of the report of the Fourth Pay Commission chaired by Justice P N Singhal of the Supreme Court. The report published in December 1986, traced the ‘custom’ of providing pensions for aged employees who were no longer able to discharge their duties efficiently to the nineteenth century in Europe.

PENSION AN ENFORCEABLE RIGHT

Referring pensions to former members of the armed forces and civilian employees of the central government, the report categorically declared: “In so far as these employees are concerned, pension is not by way of charity or an ex-gratia payment, or purely social welfare measure, but may fairly be said to be in the nature of a ‘right’ which is enforceable by law.” The report also drew sustenance from the judgment of the Supreme Court in the ‘Deokinandan Prasad Vs State of Bihar and others’ (1971- Supp. SCR 634) which held that “pension was not a bounty payable on the sweet-will and pleasure of the government and that on the other hand, the right to pension is a valuable right vesting in a government servant.” The court also held that the right to receive pension “is property under Article 31(1) …” and under Article 19(1) (f) and it is not saved by sub-article (5) of Article 19.” Though right to property is no longer in vogue as a fundamental right the validity of the right to pension is well substantiated.

Having firmly laid the legal basis of the right to pension, the Fourth Pay Commission Report went on to trace the historical background of this right as it developed in India.  The report recounted: “As a result of the recommendations of the First Central Pay Commission, the Liberalised Pension rules, 1950 were notified on April 17, 1950, with option to those who had entered permanent pensionable service before October 1, 1938, to come over to those rules or continue under the earlier regulations and orders.” There was continuity in that these were in the nature of “modifications to the earlier Civil Service regulations and instructions and implementation of later pay commissions. Ultimately, a single set of rules called the Central Civil Services (Pension) Rules 1972 were issued and came into effect from June 1, 1972. The Civil Pension Commutation Rules, 1925, were replaced by the Central Civil Services (Commutation of Pension) Rules, 1981, and came into force from July 1, 1981.” The option as stated above notified allowed employees hitherto covered by contributory provident fund to come over to coverage of pension.  And the option continued thereafter, so much so the Pension Rules of 1972 referred to employees to whom these rules applied simultaneously listing out exclusion from pension of “persons entitled to the benefit of Contributory Provident Fund.”

It would be interesting to note that the Fourth Pay Commission did not merely deal with the legal basis of provision of pension but also dealt with the philosophical and moral basis too to buttress its recommendations. The Commission postulated: “but the concept of ‘pension, however old in its origin, had the latent and real desire to provide for an eventuality – known or unknown. The known eventuality was old age and probable reduction in earning power, while the unknown eventuality was disability by disease or accident or death. Its real purpose was security, even though the beginning was oblique, undiscernible and faint. But the germ of an effort to provide security ran through the provision and it is natural that it should have grown and flowered with the development of human understanding and desire to look after and provide for those who deserved it, for man has constantly been seeking means by which to enhance his economic security… Some benevolent employers go to the extent of regarding pension as an absolutely indispensable complement of wages – as a terminal benefit. That, however is apart from another aspect bearing on pensions – the social benefit….”

The report goes on to declare: “the political philosophy to which the State has committed itself is also a relevant factor. Thus in a country like ours where the Preamble to the Constitution itself declares that the people had solemnly resolved to constitute it into a ‘socialist’ democracy and to secure to all its citizens ‘justice, social, economic and political’, it will be quite reasonable to hope that an honest effort will be made to achieve that objective. … The political philosophy of the State is also a relevant factor in determining what will be a proper and suitable scheme of pension.”

The Commission has made one other factor clear that the pensioners constitute a class by themselves (upheld in the Punjab and Another Vs. Iqbal Singh and D S Nakara (1976 - 3 SCR 360 & D S Nakara Vs Union of India AIR-1983 SC 130) and there could be no discrimination among them on the basis of the date of retirement (for that matter their date of appointment as well).

ANALYSIS SUMMED UP

From all this certain things are crystal clear:

1. Pension is not a gratuitous payment;

2. It is a social, moral and legal commitment; it is enjoined that the State should expand the scope of its coverage and not abridge it.

3. That includes protection of the class of people who are already entitled to it, like the government employees who constituted a class by themselves. Any differentiation such as the one sought to be made as between those who were appointed on or after April 1, 2004 and others would be discriminatory on moral and ethical grounds as well.

4. For the government employees pension was in substitution of the contributory provident fund and it is not as if the government was paying pension from out of taxes.

5. The scheme of pay-as-you-go is by no means an irrational concept and is in vogue in many countries. Be that as it may, pension for government employees is in reality, in lieu of government’s contribution to provident fund.

6. Merely because the government did not fund its contribution along with those of its employees and constitute a pension trust (as is done in many countries including in respect of Federal Social Security in the US, its character does not change.)

7. The government should make public what would be the value of the fund if such funding had taken place and not beguile the general public into believing that it is paid out of the revenue. (In respect of Social Security in the US, where the Trustees park the funds in US Treasury bonds whose worth, it is estimated, is a whopping $4.5 Trillion. This is what the Federal government must borrow in the first two decades, to substitute social security with private accounts – vide afore said article by Paul Krugman)

8. The central theme of providing pension is to ensure certainty of defined and adequate payment when the contingency of old age, disease, disablement or death occurs. The central idea therefore is certainty. The pension reforms as contemplated by the government and as per the change brought about arbitrarily for government employees appointed on or after April 1, 2004, militates against this principle of ‘certainty’ as it would be based on the future value as dictated by the fickle stock market.

9. All along the government did not contribute to the Pension Fund as it would have done in respect of contributory provident fund. As per the new dispensation, it has to physically set apart a matching contribution to the pension fund. Has the government considered how much it would cost if it starts making the contribution and funding it and that too without the certainty of pension payments to the beneficiaries?

The government should clarify whether it intends to apply the new dispensation to those recruited to defence services as well. As per the Fifth Pay Commission recommendation, the government accepted the principle of ‘same rank-same pension’, whatever the pension was for those who retired earlier. Is the government proposing to apply the same changes to defence personnel as well as they do now for the civilians? In that event, the government is treading on thin ice. Already the problem is young men and women find service in the armed forces unattractive.

No crocodile tears please: The finance minister need not shed crocodile tears as he did when he said in feigned anguish that unless the Bill was adopted into law the 40,000 and odd government employees who were appointed after April 1, 2004 would be left without protection. All that is government requires to do is to withdraw the Pension Fund Regulatory and Development Authority Bill and revert back to the existing scheme of pension for these employees too.

The element of certainty sacrificed: The pension reform as mooted by the Pension Fund Regulatory and Development Authority Bill is precisely to introduce the element of uncertainty in an area where certainty has been held to be the salutary characteristic. A benefit like pension that requires to be expanded in scope and coverage is being left to chance and vagaries of the casino world of stock market.

Pension for others too is the need: The finance minister can follow it up by devising methods of extending assured pension to others in the organised and the unorganised sectors, including those in the agricultural sector. This is the opportune moment to introduce such a scheme for which there would be a two way contribution from the workers as well as the employers. Unlike in the industrial countries who are burdened with an aging population, in India, those under the age of 25 years constitute almost 50 per cent of the population. Contribution to such a scheme should be made an essential and additional component of wage. This should not be considered a burden. On the contrary, it would prove to be a major long term source of resource mobilisation for infrastructure and other development.

Pension reforms must be opposed: Instead, what the government seeks to do is funnel enormous amount of money of the people into the stock market as demanded by international finance capital with attendant uncertainties for those who seek protection through pension when they are most vulnerable. What the government wants the people to do is to speculate on their retirement benefits and hope. This is madness. This is an anti-workers regressive exercise. This amounts to turning the clock back on an essential social security measure. This must be opposed.

(The author is President of All India Insurance Employees’ Association)