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Pensions May Increase Fiscal Pressure
Sify
India, New Delhi
June 8, 2005
Plan for federal government employees to pay pension contributions for the first time may increase pressure on public finances, rather than reduce it, possibly for decades to come.
India made it mandatory, from Jan. 1 last year, for new federal employees to contribute 10 percent of their salary to a new pensions scheme, an amount the government would match.
The government hailed the new system as a fundamental shift in policy that would ease the pensions burden on government finances.
But that may not be the case because it could take decades before the benefits of the contributory scheme roll out, said Pronob Sen, a planning commission adviser told Reuters.
"The pressure on the public finances will not only remain, it will in fact increase," he said. "The shift to the new pension scheme will put more pressure on government finances for the next 30 years or so than if you had not changed."
Sen said the government now has to pay contributions to employees' federal pensions under the new scheme while maintaining payments under the older scheme for employees in place up to the end of 2003.
Under the new scheme, federal pension contributions will be paid into a managed fund so that benefits will be determined by market returns.
The government bears the burden for the fixed returns available under the older scheme.
A government panel estimated the government's payments to maintain the old pensions scheme alone will rise to $6.9 billion a year by the financial year ending March 2010 from $3.5 billion paid in 2003/2004.
Mounting pressure?
In India, Asia's fourth-largest economy, retirement benefits are available to about 11 percent of the working population, which includes about 3.4 million federal government employees.
The remaining 89 percent of the workforce is engaged cash-in-hand and not covered by a formal pension scheme.
The government's desire to cut the pension burden on its books is easy to see.
Its economic survey for 2004/05 showed its pension liability rose an average of 21 percent a year in the 1990s.
It has been mounting since then and together with interest payments it makes up half of India's federal spending.
State governments also have steep pension liabilities. States' pension spending as a proportion of revenue receipts rose to more than 10 percent in 2000/01 from 5.4 percent in 1990/91.
"We are carrying a lot of historical baggage already," said Shubhada Rao, director of independent Economic Consulting Group.
"As it is the fiscal pressures were there but by the time they ease, till the contributory system rolls out, maybe it will be several years for the benefit to flow."
The Indian government posted a narrower-than-expected fiscal deficit of 4.1 percent of GDP for the year ended March 2005.
Analysts say the impact of higher spending for the poor and strong fiscal pressures, such as pension costs, could hurt fiscal reforms in the years ahead.
"Going forward there does appear to be some slippage in fiscal reforms and the fiscal improvements that we had seen in the past three years have slowed," said P.K. Basu, managing director of Singapore research firm Robust Economic Analysis.
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