Discarding pension principles?

Pensions are deferred wages and must be linked to last wages drawn, as they reflect respective state of the world and terms of employment.

“One Rank One Pension” went from being a catchy-but-mysterious phrase to a conversation-ending slogan to government policy, without going through the intervening stages of being widely understood and debated. The government and the media did not properly explain the present system, the veterans' grievances, the OROP demand or its ramifications.

The modified parity system that takes those retiring at the same rank in different years to at least the same pension band (differences persist within bands), and the system of adding years of service for jawans for pension calculations, have ensured substantial parity. For most ranks, the average intra-rank differences are now much smaller. The basic grievance of veterans is that they are denied a benefit (decadal improvements in the emolument structure, following Pay Commissions) only on account of having retired earlier. Surgical changes (for example, one-off adjustments) could address this debatable grievance. The OROP itself has many definitions, each with different consequences. The decision raises important questions.

The OROP is not a matter only between government and veterans. Because of its implications, it concerns us all, even the future generations. We hope the decision was based on robust analysis of long-term consequences, under various scenarios. At least now, can we the citizens access that analysis, to educate ourselves about this change?
The episode revealed an unhealthy level of mistrust between the government and the veterans. Even after Prime Minister Narendra Modi reiterated the promise, the veterans continued demonstrations and hunger strikes. This has set a precedent. Shouldn't the government have insisted that veterans discontinue their demonstrations before the announcement?

There is a complex, dialectial relationship between excellence and justice. Military values teamwork but also rewards individual excellence. It provides opportunities of faster promotions, and delays promotions for performance/ punitive reasons. The pension of a person who reaches a rank earlier and spends more time in it should not be compared with that of a person who reached that rank later. What OROP will do to the military's culture of excellence is uncertain.

It appears the demand of OROP for those who retire early has been accepted. Such retirements can be on the person's application (subject to approval), or the person may be boarded out on medical grounds. Had they stayed on, they would have benefited from longer tenure and pensions would have been higher. Why should OROP apply to those who on their own decided to quit the service?

The OROP decision will have consequences for government's fiscal management, principles underpinning government pensions, and the balance bet-ween the benefits government officials enjoy and what the other citizens get.

For 2015-16, the government has allocated about 3 per cent of its budget for defence pensions. Adding government's estimate of OROP's costs, which one hopes is based on a survey of the retirees in the reference year, this will now be about 4 per cent.

This year, subdued energy prices may keep the subsidy bill low, but such benign conditions will not persist. Which claim will this additional pension liability crowd out? Or will the government increase taxes, or borrow money?

Beyond the next few years, the costs of OROP are uncertain. It is almost impossible to make medium-term projections, as the revisions will be based on intra-rank distributions, which will be dynamic. Only when the revision comes up would we know the outgo. This uncertainty is perhaps a bigger problem with this decision than the known costs.

The OROP may appear just, but other forms of justice also matter. Qualification requirements and terms of service change over time. Is it just to equate pensions of two persons who served on different terms? Pensions are deferred wages and must be linked to last wages drawn, as those wages reflect the respective state of the world and terms of employment. Has the government abandoned basic principles of pensions?

Uniform pension system

Till now, the principles of pensions were the same for all government officials, with two important differences – adjustments for jawans in the military who retire early, and contributory pensions (National Pension Scheme – NPS) for paramilitary and civilian personnel appointed after 2003. For those appointed till 2003, it is a uniform and consistent system. Only officials who reach the apex scale effectively get OROP, as it is a fixed scale with no band. Most officials do not reach that scale.

Will OROP be extended to other services? If not, what principle will justify this distinction, especially vis-a-vis paramilitary forces? The BSF and the CRPF personnel also put themselves in harm's way. It is argued that they retire late, but so do many military officers. The OROP takes the pension system for military veterans farther away from contributory pensions. It would now be very difficult to make military pensions contributory. More importantly, this would strengthen the demand of other services to go back to defined pension benefit.

Members of our parents' generation do not enjoy the kinds of retirement savings that are now possible, unless they had been savvy investors. Retired government officials are partially insulated from this fact of life because their pensions increase by more than what is required for inflation neutralisation. By giving OROP, the government has created an even bigger gulf between government officials and the rest of us. On the other hand, we give pittance to the disabled, the widows and others in need. Shouldn't there be some sense of balance in such decisions?

The OROP decision has raised more questions than it has answered. It has unsettled some important principles. Only time will tell the full consequences of this decision. It could hamper fiscal management, jeopardise the pension system, and demoralise paramilitary and other personnel. It will hurt the balance between the privileges of government officials and other citizens.

(The writer is Senior Consultant, National Institute of Public Finance and Policy, New Delhi)

The views expressed here are solely those of the author.