In December 2019, nearly 800,000 French citizens demonstrated and disrupted vital services. They opposed pension reform with the limited aim of consolidating 42 different pension schemes into a universal points-based system. In September 2018, thousands of Russians protested against a reform that increased the retirement age. Russian President Vladimir Putin’s approval ratings have plummeted by almost 10% and he has partially reversed an increase in the retirement age for women. These two examples illustrate that pension reform is a thorny public policy issue. The problem of defense pensions in India is no exception.
Defense pensions made up 26.4 percent of the Department of Defense budget in FY21, up from 18 percent a decade ago. The increase in the pension bill resulted in an equivalent drop in the equipment purchase budget. With the implementation of the One Rank One Pension (OROP) scheme, it has become clear that pension spending will continue to grow faster than all other components of the defense budget. If the stated objective of the recently announced Agnipath device tries to distance itself from the problem of pensions, it does not hide the fact that the control of salary and pension expenditure is an underlying motivation for this reform.
The story of this burgeoning defense pension bill has valuable lessons for policy-making. Here’s how India’s defense pension bill became a financial burden.
Prior to 1965, soldiers below the ranks of officer were recruited through a mechanism resembling Agnipath, in that they served seven years of compulsory service and received no pension upon retirement. This period of service was first increased in 1965 to 10 years to strengthen the armed forces after the defeat in 1962. Since a pension required a minimum service of 15 years, most soldiers were still not admissible. In 1976, this 10-year length of service was increased to 17 years, meaning that every soldier under normal circumstances was eligible for a pension upon retirement. Along with the welcome development of longer life expectancy, the number of retirees has also increased steadily. The combined effect of these factors has been a rapid increase in the pension bill. Of ₹228 crores in FY81 pension spending galloped to ₹5,923 crores by FY99.
The Kargil Review Committee (1999) sounded the alarm on the issue of pensions, raising the idea of reducing the length of service to seven to ten years. As an alternative, the committee also proposed a reverse lateral induction mechanism, whereby a paramilitary force recruit would be delegated to the armed forces for seven years and then repatriated to the parent organization. Through this mechanism, experienced soldiers could be retained longer in the national security system while reducing the pension bill. None of these alternatives has received political approval.
Meanwhile, in 2004, the Union government was able to find a long-term solution for retired civil service executives. While continuing to pay pensions to all current employees, the government transferred its new employees recruited after January 1, 2004 to the National Pension System (NPS). The NPS is a “defined contribution” scheme, where the pension is paid from a corpus that the employee and the government co-create during the period of employment.
Over time, this decision will likely make the pension bill viable, as the liability is not passed on exclusively to future taxpayers. However, army personnel have been left out of this reform, mainly because non-commissioned soldiers retiring after a short service of 15 years would not be able to build up a solid corpus, unlike their counterparts. civilians who have served twice that period.
The missed opportunity in 2004 proved costly. By 2014, public discourse had moved in the opposite direction. Rather than tailoring the NPS to the soldiers’ needs—which would have been an ideal long-term solution—the National Democratic Alliance government implemented the OROP program. By agreeing to a defined benefit plan that periodically resets to current employee compensation, the Union government has thoughtlessly committed itself to a perpetually rapidly growing liability.
While the government was happy to launch the box on the road, the Covid-19 pandemic was a wake-up call. On the one hand, public finances have been unbalanced. On the other hand, the border standoff with China has made it clear that defense reforms are not only essential, but also urgent. The creation of the position of Chief of the Defense Staff (CDS) was the first step. The late General Bipin Rawat repeatedly drew attention to unsustainable defense pensions. During his tenure, a few alternatives were discussed. However, each available option came with its own set of implementation challenges. From this imperfect set, the government chose to reduce the default length of service to four years, calling it the Agnipath program.
This short history of defense pensions has two important lessons for public policy. The first is the need for ex ante budget projections of government plans. Seemingly innocuous changes in retirement policies can have negative effects that are hard to reverse. An institution such as an independent fiscal council can help citizens and politicians understand the financial consequences of such plans before they are implemented.
Second, pension reforms are like six-day test matches. Reducing the pension of serving employees would be an immoral breach of trust. And therefore, the option of reform can only attack future employees. Moreover, the reforms carried out today can, at best, contain the increase in expenditure a few decades later. Therefore, it is imperative to exercise caution when it comes to retirement policies at the start-up stage.
Pranay Kotasthane is Chair of the High-Tech Geopolitics Program at the Takshashila Institution Opinions expressed are personal