One Rank One Pension – some thoughts

There has been a lot of debate of late on whether veterans should be moved to a “one rank one pension” system. I won’t bother explaining the whole deal here, I’ll let you read this brilliant post by Ajay Shah about the numbers behind the move. Now that the quant has been outsourced, I can put forth my “qualitative” arguments.

I’m not a fan of this One Rank One Pension (OROP) move. I’m not against paying our soldiers, or veterans, well – I think it must definitely pay above market rates for the skills required for the job. Yet, I think OROP is a “one delta” solution to the problem (previous post here about government’s one delta thinking on agriculture), and can lead to massive unfunded liabilities.

The problem with any kind of pension scheme is that you create liabilities today that need to be funded later on. And at a later date these liabilities might become unserviceable. From this perspective, it is important to try and fund any future liabilities today, or at least have a handle on the precise magnitude of liabilities required. OROP, being “inflation indexed” (that’s Ajay Shah’s nice model to look at it), doesn’t allow for proper budgeting and long-term planning.

It is precisely due to this budgeting issue that the government moved most of its incoming employees to the New Pension Scheme (NPS) in 2004. NPS, unlike previous pension schemes, is a “defined contribution” scheme, where your pension is paid out of a corpus you create by your own saving. From an accounting perspective, it moves liabilities from tomorrow (pensions) to today (higher salary to fund the contributions), and is an excellent move. And there is no reason for it not to apply to the armed forces.

Most of the arguments being made in favour of OROP are emotional (“how can you deny our veterans money” etc.), and not well backed up by logical or economic reasoning. One of those is that lower-level military persons retire when they are 35, and hence need a “one rank one pension” (which I absolutely fail to understand). While I understand that the rigours of the role imply early retirement, I don’t see why defined contribution doesn’t solve the problem. It will have to be matched with higher salaries (to fund the contribution required for a long lifetime of retirement), but that implies liabilities are funded today, which is superior to pushing liabilities under the carpet for future ¬†generations.

The thing with NPS is that it cannot be pushed retrospectively, and hence can apply at best to all forthcoming hires. We still need a solution for the existing employees and veterans, who are already on a defined benefit scheme. Yet, the important thing to consider is that the beneficiaries should be divided into three categories – current veterans, current servicemen and future servicemen, and we should find separate solutions for the three.

It might be argued that without defined benefit pensions, it might be hard to attract talent for a high-risk job like the military, and that is why we might need OROP. This is where the “derivative thinking” comes in. The thing about a job in the military is that there is a higher-than-civilian risk of losing life or limb. The solution to that is not blanket higher compensation – it is risk management.

What we need is generous death and disability insurance for our military, and this too should be purchased by the military from a professional Life Insurance firm. A generous insurance package can help mitigate the risks to life borne by military personnel, and should be sufficient to attract necessary talent. The purchase of such policies from professional insurers is important, for you don’t want the military to be doing an actuary’s job. More importantly, such a purchase will push liabilities to today rather than to tomorrow, and the last thing an army will want during the time of war is increased expenses on account of insurance.

The current debate about OROP has opened the door for a complete overhaul of military compensation. The government should jump at this, rather than simply get bullied by veterans’ groups. As Nitin Pai argues in this editorial in the Business Standard, compensation is an economic decision and should be made based on economic (and financial) reasoning, not based on emotion.

7 thoughts on “One Rank One Pension – some thoughts”

  1. I am an ex-serviceman. Here I see so many angles of OROP. I know of only one. OROP has, for long, been defined as same pension for people of same rank and years of service, irrespective of the year of release. It is not my point that it should be given because it is the right thing to do. It is that the present PM took the previous one to severe task for not sanctioning it (obviously in the way defined as at that moment, which is as given above) and promised that he will do so when in power. He got votes on this promise.
    If a PMs word is nothing, why should someone expect a mere soldier to stick to his pledge of dying for the country? I think the PM should be about 1000 times more worthy of trust than a mere soldier/Colonel/General. Nothing emotional in it at all.
    Anyone accepting payment must deliver after that. Or, no?

  2. Very well articulated. I also agree with the comment of Alok. The problem is that the Govt of the day does not engage the opposition political and community class in discussion on these long term decisions. This was the reason why Modi made a promise without knowing the consequences. This is also the problem in writing the manifesto.

  3. I got to see this post rather late and am therefore responding late. I do hope though that it is not too late and I will get a reasoned response from the author.
    Rather than get involved with the arguments of the commentator, I shall try and put across what, to my mind, has generally been lost in the din or ignored by the commentators against OROP.
    Firstly, OROP was not designed to be a standalone measure. It was expected to be part of a package which has been completely lost sight of. The first element of that package was the recognition that the education system in the country was not and is not capable of handling the numbers coming out of the armed forces at a young age and equipping them with employable skills that would be useful in the market place. That realization led to the second element of the package-namely sidestepping bulk of early retirees into second careers in Central and State Police. Once that is done, the numbers requiring skilling will become manageable. The third element was that the persons sidestepped will only be entitled to salary due until the age of retirement when the normal pension rules will kick in. On joining the second career, these persons would become part of the NPS and thus will no longer be part of the so called define pension scheme.
    It may be stated that none of these have been implemented for over thirty years and the chickens have thereby come home to roost. In my view even now, it is not too late to start the process of sidestepping of armed forces retirees to CPMF/Police.
    Grant of OROP, at this point, can only be delayed at nation’s peril. From what I read in the papers and from TV channels, it appears that the men are getting disenchanted along with the veterans. We know what happened in 1962 when we had only the officer corps that was dispirited. Imagine the horror when both officers and men are dispirited!
    I sincerely hope that I am wrong and that wiser counsel will prevail.

  4. There is no emotional argument to OROP . It is a well defined logic in consonance with what is happening the world over. Lets take the points given :
    Applying NPS to MIlitary – with soldiers retiring at 37-40 and officers retiring at 54- to have same level of pension through NPS what civilian Govt officer have means the pay should be 3-4 times of what a civil govt official of equivalent rank gets. if the Govt is willing to do that there is no problem with implementing NPS for military.
    World over military gets a generous pension- generally varying from 75% to 100% of last pay drawn while civilian govt staff gets 50% of last pay drawn. Lets take the case of USA
    A short service officer with less than 20 years gets $1500-2000 throughout his life, In India he gets only gratuity and PF savings.
    All officers who have 20 years or more than 20 yrs of service have pension starting from 50% at 20 yrs and is increased by 3.5% per additional year of service. At the age of 65 all OROP is impelemted and all persons of equivalent rank get same pension. Again if the Govt is willing to do this,OROP need not be implemented.
    Now lets take financial effect-Rs 8500 Cr including the backlog of 4 yrs , Once implemented the additional burden is Rs 2500 Cr per yr (after fulfilling the backlog). Is it too much? The Govt has Rs 1.25 lakh cr to gift Bihar on eve of elections.
    Why is OROP being implemented for Apex scale of Govt since decades -who least require it?
    India is surviving today since it has a huge population and unemployment and hence no dearth of volunteers for military service. The day population stabilizes – no on will join military under these conditions as is happening in Western nations.
    Pl show me one nation in the world where the military pension is equal to or lower than than civil Govt staff- as in case of India and I shall accept all distorted arguments of the author

  5. The numbers indicate that there are 2.5 million retired military personnel. Although the standing armed force is about 1.5 million, they are paid a salary, not pension. Therefore, retired personnel make up about 2% of India’s population. If remuneration is to reflect “markets” we must take into account what our armed forces are doing and what “economic value” they are protecting. Very plainly put, the answer is “our very existence”. Once that reality is seen it is really cheap to make a financial argument to deny a decent life to those retirees. The idea of not paying a pension at all but establish a fund and leave the ex-servicemen and women to the inflationary wolves is a typical Reaganesque chenanigan being enforced by many American states. Why Indian financial lights that be look at the American model and not the German model remains a mystery to me. Pensions indexed to inflation should in fact be mandatory to private as well as public sectors. It will require bold refashioning of the tax system. It can be done; just look at Germany!

  6. All i can see is Pension is less , Pension should be increased . Words like Pension , expenses …. not enough are all into play . When i hear all this hullaboo I cannot help but relate to myself and lakhs if not crores of people like me who are working in private sectors . My story is
    I am working in a private sector . What i earn minus taxes minus what i spend is what i save . This what i save is to last me after retirement till i die … How ? i dont know ?? I have NO pension ,,,, Zero , Zilch and when I look at people who cry that they are getting only 50% or 30% or 10% of last pay . I can’t put what i feel in words . What about me and lakhs of guys like me !! You are getting something we have no scope . Now why we dont deserve any is because we are not at the border or employed by the central or state government so in fact have not contributed to the growth of the nation . Now another question that would come to anybody’s mind is that was i not aware of the situation before i joined the private sector ? I was .. and If i was aware then i should accept the situation and should have planned accordingly . Why i landed in the private sector and not in government service … General category , lots of reservation ,, etc etc is a different story … May be the private sector employees need to start a new revolution for pension after retirement . After all the govt takes so much money when we are working so we too deserve something when we retire. In the end all i can say is that Pensions indexed to inflation should be mandatory to private as well as public sectors . We too as HDFC life ad says “deserve to jiyo sir utha ke ” .

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