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Rational Expectations: Short step from OROP to Greece

Financial Express Column: Rational Expectations: Short step from OROP to Greece
As OROP-type demands spiral, so will pensions—the present value of govt pensions is already 1.2 times GDP

The underlying theme of the One-Rank-One-Pension (OROP) debate is one of a nation needing to do right by its war veterans. The veterans, the argument goes, put their lives at risk to defend the motherland, so surely a grateful nation can ensure they have a decent living? How demeaning it is, the argument goes, that a colonel who retired in 1980 should be getting a pension lower than his son who retired in 2010.

Emotional arguments, however, only obfuscate the issue. A pension is really nothing but a deferred payment of wages, to help those that served—in the army, in schools, in hospitals, wherever—maintain a certain standard of living after retirement. To that extent, it has to be related to the salaries paid during a person’s working life. So, to use the logic of those in favour of OROP, if the country wanted to reward a soldier more, his salary should have been much higher than it was at the time he was serving, there’s no point hiking it post-retirement. In any case, OROP was never a term of service.

And it is not as if the nation is not doing right by its soldiers after they retire, or by its bureaucrats, for that matter. The colonel-father getting a pension lower than his colonel-son conveys the impression that veterans are living in penury, but that is not true for either them or the millions of civilians the government has on its payrolls.
Some examples are worth keeping in mind. In the case of the army, 12 years ago, a colleague’s mother got a monthly family pension of R8,000—her father retired as Lieutenant Colonel—but this is now R40,000. On the civilian side, an additional secretary who retired 5 years ago got R57,000 as pension then, but gets R75,000 today. A joint secretary who retired in 2004 got R35,000 as pension then, and this has gone up to R60,000 today. In the case of a secretary who retired in 1993, the pension has gone up from R4,000 then to R102,000 now! Whether for army officers or for bureaucrats, pensions have been galloping and the biggest beneficiaries are those whom have been retired for a longer period of time. Do the same exercise for anyone not employed by the government, whether a humble peon or the chairman of Hindustan Lever, or those who save 24% of their salary in the EPFO—there are 6 crore such people today—and you will find there is no such equivalence, anywhere.
The reason for this is the way the government calculates its wages, and therefore salaries. So, let’s say a person—this applies to joint secretaries, teachers, havildars, colonels, everyone employed by government—retired in 1995 with a basic salary of R10,000 and a pension of R5,000 based on the principle of pension equalling half of the last pay. In the case of all non-government employees, this amount would be worth nothing today given inflation in the last 20 years. In the case of government employees, however, the salary/pension is indexed to inflation. So, between 1995 and today, the basic salary—and therefore pension—will be increased every year to take into account inflation.
And every 10 years, a Pay Commission comes and takes care of the rest. Let’s go back to our government employee and assume he was in the middle of a scale running from R8,000 to R12,000. Between 1995 and 2005, while the basic would have remained unchanged, the actual salary would keep rising since the inflation-indexed dearness allowance (DA) keeps rising. Now assume the last Pay Commission raised this pay scale to R18,000 to R24,000. Immediately, the salary of those at the top end of the pay scale would have risen to R24,000, with the DA reduced to zero. And then, from 2006 onwards, the DA would have started rising again each year till 2015, when the new Pay Commission comes in.
What happens to pensions? This is where OROP comes in since, once this is accepted for the armed forces, there will be demands to extend this elsewhere also. For people who retired in 2005, the basic salary is reckoned at R24,000 in our example, as a result of which the pension will be R12,000—with, needless to say, a built-in DA hike twice a year. Our friend who was in the R10,000 basic salary bracket finds his salary getting hiked to R18,000—the lowest of the new pay scale—as a result of which the pension rises to R9,000, with the DA clock set back at zero for the first year. In the sense of people of the same rank getting different pensions, it looks unfair, but does anyone who worked in 1995 get the same salary as someone in 2015, or get to buy gold at the same price, or property? And, with the next Pay Commission ready to submit its report by October—it is to be implemented with effect from next April—our friend who retired in 1995 will get another hefty pension bump.
Which is why defence pensions have jumped from R11,250 crore in FY05 to R21,790 crore in FY10 and R54,500 crore in FY16; for the government as a whole, it is up from R26,250 crore in FY05 to R60,489 crore in FY10 to R127,507 crore in FY15. To put this in perspective, India’s GDP rose from R29,71,464 crore in FY05 to R61,08,903 crore in FY10 and to R1,25,41,208 crore in FY15—so as a share of GDP, India’s pension bill rose from 0.88% to 0.92% in a decade. As a proportion of total government expenditure, it rose from 5.3% in FY05 to 7.1% in FY15.
Another way to look at this is what each pension costs. A retired secretary to the government of India today gets a pension of R85,200. LIC charges R1 lakh today from a 60-year old to give a monthly pension of R745—which means a monthly pension of R85,200 is equivalent to a lump-sum payment of R1.14 crore! If the next Pay Commission bumps the pension up to R100,000, say, the lump-sum payment goes up to R1.34 crore. If the government was to fork out a single bullet payment for its total pension bill of R127,507 crore, it would have to pay R171 lakh crore, or 1.2 times FY16 GDP! Imagine how much this will go up by after the next Pay Commission.
It is precisely because of this unsustainable Greece-style pension crisis that, in 2004, the government decided those joining the civil services would contribute a fixed amount of their salary to the National Pension Scheme (NPS) with a matching contribution from the government, and whatever money that earns would be the person’s pension; naturally, this doesn’t grow anywhere as spectacularly as that of anyone employed by the government currently.
This should have been done for the armed forces as well, but didn’t, presumably because the government felt it could bear the burden. No matter what the grievances of the armed forces vis-a-vis the civilians who retire later than they do and therefore get a higher pension, at some point, the government will have to consider moving to NPS for the armed forces since the burden is sky-rocketing and OROP will raise it dramatically. All pensions are a function, as we know, of salaries. So, if a colonel has been in that post for 2 years, he will get a salary—and therefore a pension—that will be different from a colonel who has been in the post for 6 months. Under OROP, the pensions of all colonels will equal those of the colonel who has spent the maximum number of years in the post! If this is now demanded by teachers, babus, paramilitary forces and the police, Greece is just a step away.

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  • Nilesh Redekar 9 years ago

    Now this article (by Political mind & hand in this) is to divide the Civilians with the Military persons by incorporating jealousy & hatred among both so that the Civil people including (BSF, Paramilitary etc) should not support the Military but raise a cry to grant the same rule of Pension & hence referring the issue, the case will be in court & the current situation will be tackled & slowly the gravity of issue will be eased & ultimately Govt.(Politicians) will succeed. The Point is nobody respects the Military/Men in uniform & no one loves the Country. Just for the show off 'some' Politicians including civilians just praise the Military on 15th August & 26th January or else everybody is busy in earning more & more Rs. & enjoying the holiday. Our people have not faced the situation like Syria/Afghanistan….if…. then each & every Indian not only will respect the Military but worship Military before their God.

  • An exserviceman 9 years ago

    The following points make an ex-serviceman deserving for OROP,
    1. A service man is called upon to work 24 hours without any overtime benefits, Vs a civilian who gets it'
    2. He is called for to go to the borders leaving his family and parents for facing the bullet of the enemy, Vs the civilian sits in his home town or his selected place of work in ac rooms and house along with his kith and kins.
    3. In keeping with the rule of young fighting force he is retired and sent home at an early age, put to the problem of seeking jobs with comparatively less education, when his family and children are half way through in life, with a lot of mental stress and agony, Vs the civilian who works safely, with even enlargement of his education, till he is 60 years of age, residing with their families, enjoying the company of the same friends and school or college, getting all the benefits of investing in land or flats etc..
    4. A service man is called for work for the country at all other calamities even other than war, he does not and cannot say that he will only work for war and connected works, Vs have you ever heard other civilians being called for or even coming forward voluntarily for working for such calamities.
    5. He cannot proceed on leave till his leave is sanctioned; Vs Civilians who suddenly disappear and come back after days with a medical certificate, God alone knows how much truth is in it.
    6. What ever is said and done, every service man does not have a chance to get money other than his pay packet, Vs others, the world knows, I will not write. Be it a peon, line man, or any other ………………………………how they make money.
    7. A service man has a commitment to salute his seniors, stand in 'at ease' or 'attention' when he speaks to his superior, has to wear the uniform, properly cut hair etc etc. and be disciplined. Vs civilians who have their own easy ways. If a serviceman even talks of bandh, or protest or strike, he will be punished under military law for treason and misbehaviour.
    8. A service man is ready to lose his sleep on a regular basis, to guard the nation's assets and border, go and face the enemy bullet and die for his country Vs how many Civilians can do that , how many even like a serviceman to get a better pension, OROP.
    9. Not last but the least, The serviceman does deserve OROP for guarding the Indian territory and following a principle of ' Our Commitment is Your Peace of Mind……….. Please sleep with no worries……….we are there for your safety, attitude towards every individual of our Nation.’

  • Anonymous 9 years ago

    As usual, obfuscation, blatant quoting of huge figures, mixing up of issues and blind use of percentages.
    1. First, the pensions cannot be at 1.2 TIMES the GDP, otherwise not Greece, but even dustbinstan would be better than us. The value must be 1.2% OF GDP
    2. Common sense. Part 1. There are always more dead people than alive, and more retired people than serving. So, What about the corpus funding the pension accounts of those who have passed on? where are those funds? Why arent they used to fund present pensioners?
    3. The life expectancy of a civilian employee is more than that of a defence employee, says these reports: http://www.thehindu.com/2005/12/29/stories/2005122904610900.htm and http://reportmysignalpm.blogspot.in/2013/07/life-expectancy-of-soldier-less-than.html
    4. If you want to take things unemotionally, then answer me this: How much money will you take to die for your postman, or give an eye for your vegetable vendor, or part of your face for that news reader on TV. Lets put a cost on your body parts, so we know your "value" and can evaluate whether to pay you for your parts or not when you are no longer capable(which should be very soon from the signs). Dont ever forget that the pensioners demanding OROP are all people who have spent their entire productive years committed to die for the same people I mentioned above, and ironically, you too.

  • Anonymous 9 years ago

    If the Government thinks the demand for OROP is not sustainable, they should say so ,instead of giving false promises.

  • If perks of Armed Forces Personnel is so highly comparable and lucrative Why the educated youth of the country is not joining Defense services? Why they prefer other jobs resulting into huge deficiencies in the Officers Category?
    Yes. It is important to keep the perks and pensions of defense persons under check to avoid a Greece like situation. But which country we will be comparing to if the people country refuse to join the defence services?

  • Anonymous 9 years ago


  • Anonymous 9 years ago

    Hy………LLalu…………..just think about nature of duty of Jawan and his family condition when he has away to border………..ur saying civilian part like babu, teacher etc………..where they stand (Leave all things and declare Military pension as special PENSION ) not like LIC or civil pensions scheme ok………………Corrupt….Bharat….Mahan (Bol….te…ho)…….shame 2 u all

  • To ignore unhappiness among the EXServiceMen is undesirable, but to brush aside and snub disenchantment among the serving Armed Forces is dangerously foolish. Which is why, even with an unblemished 6 decades plus service record by the Armed Forces since independence, the equation between the Armed Forces and civilian masters remains skewed against the the Armed Forces, with great possibility of greater disillusionment within. It is the civilian leadership of India have brought us to this perilous state? Their acts of commission and omission have created a hostile environment within and around India, making it impossible to drastically decrease the size of our Armed Forces just to cut the pension bill. So don’t blame the Armed Forces for the number of pensioners. Young men are enticed to join the Armed Forces because there is a pension, which is a big attraction. Our large population ensures multitude applications for few vacancies, and we get a voluntary Armed Forces that is exploited to the hilt by civilians, and then aborted like unwanted pregnancies at an young age. How long will this carry on? The number of retired Officers and Other Ranks is large. Studies have shown that for every serving man/woman, the number of pensioners will soon double. Big standing Armed Forces is inescapable to defend our land, its coastline, air space and borders. Add to this are the burden of keeping Armed Forces manpower available for, taking over tasks of the para-military, disaster relief, mega national events etc. Looking at the politico-economic-adversarial relationship with our neighbours, the regional inter-se equations and our global ambitions, trimming the Armed Forces is not an option today