Centre's Pension Bill	1995-96	2001-02
Civil	1,103	4,320
Defence	3,197	10,770
Railways	2,117	5,800
Total Central govt. pension	6,928	22,410
Figures in Rs crore
States' Pension Bill
	1994-95	2000-1
Andhra Pradesh	746.1	2,155.6
Gujarat	381.2	1,360.4
J&K	54.9	495.0
Maharashtra	488.9	2,326.3
Tamil Nadu	635.8	2,517.1
Uttar Pradesh	497.8	2,126.5
All states	5,107.4	23,820.3

India's bloated bureaucracy and its enormous wage bill have long been a drain on government resources. But there's a bigger time bomb ticking away in the exchequer. The Central government's pension bill has grown exponentially in the past five years, increasing more than three times from Rs 6,928 crore in 1995-96 to Rs 22,410 crore in 2001-2.

This massive financial obligation to yesterday is playing havoc with India's tomorrow. As a percentage of the GDP, the Central government's pension liability has doubled between 1995-96 to touch 1 per cent in 2001-2. The biggest slice of the pension pie was gobbled up by defence personnel during this period. Pension to retired servicemen rose 236 per cent-from Rs 3,197 crore to Rs 10,770 crore. Civil servants kept pace: their pension payout grew by 291 per cent from Rs 1,103 crore to Rs 4,320 crore. "The government's pension liabilities have assumed dangerous proportions," says Manish Sabharwal, managing director, IndiaLife Hewitt, a company that manages and administers pension funds for private establishments.

States have burnt a bigger hole in their pockets. Rich or poor, industrialised or agrarian, irrespective of their financial situation, states have been giving out generous pensions to their retiring employees. The consolidated pension liability of state governments has gone up 366 per cent from Rs 6,146 crore in 1994-95 to Rs 23,820 crore in 2000-1. The deteriorating economic and law and order situation notwithstanding, Jammu and Kashmir's pension payout grew by an astounding 801 per cent from Rs 54.9 crore in 1994-95 to Rs 495 crore in 2000-1. The commercial hub of the country, Maharashtra, saw its pension bill soar by 376 per cent from Rs 489 crore to Rs 2,326 crore during the period.

Economy

THE PROBLEM... » Pension seen as perk, with no contribution by government staff. » Fifth Pay Commission linked pension to wage revisions. » Number of pensioners has risen with rise in life expectancy. » Government overstaffing made matters worse. AND THE SOLUTION » Make pension contributory like provident fund for all new workers. » Scrap guaranteed pension. » Make pension dependent on returns on corpus at retirement. "The pension liabilities have assumed dangerous proportions." Manish Sabharwal, Managing Director, IndiaLife Hewitt

The problem was triggered five years ago when the I.K. Gujral government implemented the recommendations of the Fifth Pay Commission. The panel had suggested a generous upward revision of Central government salaries with retrospective effect from 1996-97. The Pay Commission also made two fundamental changes in the government's pension policy. It linked the pension being given to retired employees to the salaries of serving employees, implying that every time the government revised salaries, the pension automatically got revised. This was extended to all existing pensioners, irrespective of when they retired.

Further, the commutable amount-money taken as a lump sum on retirement-was increased from 33 per cent to 40 per cent. In 1999-2000, the Central government paid out Rs 290 crore as commutation to its retiring employees. This caused an immediate outgo of funds for the government without a proportionate decrease in its pension liability.

As if this was not enough, the projections of the Fifth Pay Commission missed the target by a mile. The panel had estimated that the Centre's pension burden would rise by around Rs 1,170 crore annually (Rs 3,510 crore over three years between 1997-98 to 2000-1). But the pension bill actually rose by Rs 7,239 crore during the period. Worse, the Finance Ministry estimates that given an annual inflation rate of 6 per cent, the pension liability of the Central government is likely to swell to Rs 29,891 crore by 2009-10.

To be fair, even if the Fifth Pay Commission had not been so extravagant, the pension programme of the Central government was hurtling towards a financial disaster. Unlike the provident fund, to which the employer and the employee are joint contributors, the monthly pension of Central government employees-which works out to around 50 per cent of the last drawn salary of the beneficiary-is paid out of the government's current revenues. The employees, even those working for commercial enterprises like railways and telecom, do not contribute anything for the pension benefits. In 1999-2000, the Central government and state government together gave out Rs 41,740 crore as pension. Gautam Bhardwaj, director of Invest India Economic Foundation, a policy research organisation, says, "In the absence of any dedicated fund, the government is paying pension out of taxes and borrowings, something it can ill afford."

Making things worse for the Government is the changing demographic profile of the Indian population. Life expectancy has increased substantially in the past two decades-from 54 years in 1980 to 63 in 2002. This means more pensioners. In March 1998, there were 52 lakh Central government employees and 35 lakh pensioners. And there are more retired defence personnel than those still in service. In the railways, the biggest employer in the country, there are 64 retired staff for every 100 workers.

This will only become worse. The number of Indians over 60 years is expected to grow from 7.6 crore in 2000 to more than 21.8 crore in 2030. Also there will be more retirees among government servants in the next 10 years because of a 57 per cent increase in employment between 1957 and 1971.

Pension schemes that guarantee a fixed amount have faced major problems across the world. "Worldwide countries have been moving away from guaranteed pension schemes," says Bhardwaj. The Margaret Thatcher government scrapped a guaranteed pension scheme in the UK in 1982. So have other European countries like Germany and Italy. Many Latin and Central American countries, including Chile, Argentina and Mexico have done away with such schemes. That's because there can be no way of forecasting interest rates-and, therefore, the income from the corpus.

The Central Government is waking up to the rapidly growing financial liability. Says a senior Finance Ministry official, "Given the level of deficit in the budget, the Government is not in a position to contribute to pension." The Finance Ministry is, therefore, pushing for reforms of the pension sector. One suggestion is to start a contribution-based pension scheme for all new employees. Such employees will contribute to a fund and the monthly pension will be worked out according to an individual's contribution, as in the case of provident fund.

A committee headed by retired bureaucrat B. Bhattacharya, worked out the modalities of such a scheme and submitted its report last year. However, though this year's Budget had set a June 1 deadline for its implementation, the Government hasn't finalised the new scheme. "The Government is still considering the Bhattacharya Committee report. We have not yet fixed a new deadline," says a senior finance ministry official.

The report has recommended a hybrid pension scheme that envisages fixed contributions and fixed benefits. Though the Government is willing to go with a contributory pension scheme, it has reservations against a pre-determined pension. The report has added a rider that in case there is a mismatch in the corpus and the payout, the government can make adjustments in the contribution to avoid any unnecessary financial liability.

While the Central Government is considering reforms in the pension sector, the states have by and large turned a blind eye to the mounting pension liability. Barring Himachal Pradesh none of them are even talking about it. "I believe they are waiting and watching the Central Government," says Ajay Shah, consultant, Department of Economic Affairs, Ministry of Finance. In doing so, they are putting off till tomorrow that they should have done yesterday.