ET Edit: OROP should be granted only if fresh recruits are moved to contribution-based NPS

The demand for one rank, one pension (Orop) is high in emotive content and also in the potential to blow a hole through government finances, as all civil and paramilitary employees demand parity.

Orop can and must be granted, if, and only if, all fresh recruits are moved to the defined contribution-based New (now dubbed National) Pension System (NPS). This is fair deal and it is the job of politics to explain the fairness to the public.

Any pension scheme must be assessed within the framework of four factors: affordability, adequacy, fairness and transparency. Affordability for the government is a systemic assessment: if the government has to borrow too much to pay pensions, it would feed inflation, eat into all fixed incomes and put upward pressure on interest rates, and hurt the present and the future to pay for past over-commitments.

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At the same time, the pension must meet the requirements of a decent life for the pensioner. People who served at similar levels drawing vastly dissimilar pensions is unfair. And pension schemes must be transparent about how they are funded, how they generate revenue and what the implications are of any choices pensioners of fund managers make. These concerns led the government to create NPS for civil servants.

Since the employee’s and matching employer’s contributions are linked to his income and length of service, the NPS pension would meet the criterion of parity implied in the demand for Orop.

It is affordable for the government, because it began to fund pensions early in the demographic transition — a bulge in the working age, taxpaying, population occurs when the state bears the double burden of pensions of the pre-NPS employees and funding its NPS contributions. Will it be adequate? Given India’s bright prospects as an economy, competent deployment of the NPS corpus to command a share of the income it generates should offer a bounty.

With these bright prospects, the government can think of offering a floor to pensions. Prudence would dictate a symmetrical cap on pensions that derive from state contributions.