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The subject of this episode might seem boring to you, but it's one of the most interesting
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Before this, I never gave any thought to the subject of pensions.
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I thought, it's a boring, wonky subject, it affects only old people, why should I care?
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But as I found out while recording this, the concept of pensions and the design of pension
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schemes can change society.
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How many children one has, what families look like, how we choose to live our lives, even
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the relations between parents and children.
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Pensions affect everything.
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As one of my guests today, Ajay Shah says, pensions can reshape an entire society.
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And we are facing a giant pensions crisis in India now, which is also a political crisis,
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an economic crisis, a social crisis.
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I was blown away by some of the things I learned in this episode.
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Welcome to The Seen and the Unseen.
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Our weekly podcast on economics, politics and behavioral science.
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Please welcome your host, Amit Barma.
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Welcome to The Seen and the Unseen.
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In a recent episode of mine, the great JP Narayan spoke about how the one issue keeping
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him up at night was India's pensions crisis.
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That intrigued me and I looked further.
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A couple of decades ago, India had a pension scheme for his government employees, which
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was out of whack and threatened to eventually bankrupt the country.
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It was estimated that at some point, three percent of India's people, the elites who
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work for government, would be supported by 68 percent of GDP.
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And it obviously could not scale.
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Unlike some Western countries, we'd never be able to cover the whole population.
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And even supporting the three percent could take us to financial ruin.
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Luckily for us, wonks, bureaucrats and then politicians figured this out.
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And something called the NPS or the new pension scheme was designed.
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This was implemented from 2004 onwards and it removed the future fiscal burden on the
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The Vajpayee government championed it and made it happen.
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The Manmohan Singh government realized how important the NPS was and supported it.
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There was political consensus.
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There was a triumph of sound economic thinking.
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Well, the NPS was hard to understand for its beneficiaries, the nature of politics change
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becoming ultra polarized.
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And today across different states in the country, the old pension scheme or the OPS is making
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It doesn't help those who are supposed to benefit from it and it will end up bankrupting
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Now, I wanted to record an episode that is not just a primer for this current crisis,
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but also the definitive guide on pensions themselves, how they originated and evolved
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worldwide, how they reshape societies all the way to this current crisis.
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And my guests for this are Ajay Shah and Renu Kassane.
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Ajay was one of the people who actually worked on the design of the NPS.
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He was part of the finance ministry under both Vajpayee's NDA and Manmohan's UPA governments
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and perhaps knows the NPS as well as anyone alive.
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Renu Kassane has worked in the NPS for the last few years and is also one of India's
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top experts on this subject.
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Ajay really, really grocks the subject till 2004 and Renu Kassane has actively worked
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on this in the last 10 years.
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So you'll hear more from Ajay in the first half of this episode and vice versa in the
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Also, on some episodes, I focus on the people I am with because I love oral histories and
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personal journeys and on some episodes I focus on subjects.
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In this case, the subject is everything.
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We must all pay attention.
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So we get directly to pensions after about 15 minutes of the conversation.
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And along with pension talk, you also get to hear some mind blowing fundas about society
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as well as juicy political stories from Ajay's time working with Vajpayee's and Manmohan's
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Hey, the music started and this sounds like a commercial, but it isn't.
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It's a plea from me to check out my latest labor of love, a YouTube show I am co-hosting
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with my good friend, the brilliant Ajay Shah.
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We've called it Everything is Everything.
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Every week, we'll speak for about an hour on things we care about, from the profound
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to the profane, from the exalted to the everyday.
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We range widely across subjects and we bring multiple frames with which we try to understand
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So join us on our journey and please support us by subscribing to our YouTube channel at
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youtube.com slash Amit Verma, A-M-I-T-V-A-R-M-A.
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The show is called Everything is Everything.
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Please do check it out.
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Renuka, welcome to The Scene and the Unseen.
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Ajay, welcome to The Scene and the Unseen.
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I don't know what time this is, but you are quickly becoming the Mike Munger to me.
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To my Ross Roberts, there's a question that Ajay and I both have for you and that question
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is this, are you a good person?
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As a good economist and someone concerned with measurement, I will say define good first.
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So Ajay, go ahead and define good for her.
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You know exactly what I'm talking about.
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Renuka, in the class of episodes of Everything is Everything, what fraction have you heard?
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That makes you 50% good.
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So I'll again remind listeners that Ajay and I have this YouTube show which we've been
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doing for many weeks now called Everything is Everything.
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It's only an hour of cheerful conversation about many things.
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Do check that out if you haven't already.
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Unfortunately, I have long said I have a face for audio so you can see right on the
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But today we are going to kind of talk about the subject that I first got switched on to
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when JP Narayan mentioned it in his episode with me and he considered it like the thing
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that keeps him awake at night and perhaps India's biggest crisis.
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And to me, it almost seemed such a mundane subject.
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You know, pensions, like where's the crisis?
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You know, it's just a policy thing, you know, you move around numbers here and there.
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But before we get to the subject, I want to chat a little bit with Renuka to kind of figure
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We won't do an hour or three hours because you have promised us a full episode where
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we will, you know, discuss Renuka's revels in regulation.
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Yes, in the future, deep in the future.
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But I want to start off by asking you to introduce yourself to my listeners.
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What keeps you awake at night?
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I work at the Trusbridge Rule of Law Foundation.
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We are a new organization that works on areas of rule of law in the economy.
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I began my research career with pensions.
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So that was many, many years ago.
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And it's quite amusing that as a young person, I was worried about pensions.
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From pensions, I've sort of moved on to other areas, allied to pensions, such as portfolio
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choice of households, and then started worrying about financial regulation as it interfaces
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with portfolio choice of households.
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And from there, I started worrying about regulation as it interfaces with everything else.
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And so I think that's sort of the broad areas of work that I have done in the past and hope
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So I want to ask you a question that, you know, when I and Ajay and I have discussed
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this in various different kind of forms and ways that when I look at people within any
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profession, a large percentage of them are going through the motions.
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You know, they got the credentials to get the job.
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They're going through the motions.
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They might be technically good.
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They might have knowledge.
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They don't have passion.
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They don't stay up at night.
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They don't really care.
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What I've seen with Ajay is he obviously cares about his work that reflects on the choices
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that he's made and the things that we speak about.
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And perhaps there is a selection bias at play here, but a lot of the people who I've seen
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working with Ajay Ahmed through him, like you, are exactly like that.
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Like you people are deep in the weeds because you love it, right?
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And you really care about it and so on and so forth.
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So tell me a little bit sort of about that, that in your profession, you know, which is,
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I mean, I don't even know how you describe it.
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Are you a policy person?
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Are you an economist doing one particular thing?
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But in your field, I have met, you know, so many people who are just lifeless, not in
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the way they come across in person because, you know, they can party, but in terms of
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really caring about the subject beyond, you know, what they need to do.
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So tell me a little bit about your journey in this field and your journey in this field
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and have you had ebbs and flows in terms of how much you care about it?
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Do you feel apathetic sometimes?
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So I think I was always energetic and always cared.
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And which is why I kind of self-selected myself into this group of people.
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So I think that is endogenous.
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And then it's a cycle, right?
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So you're around people who care a lot and who are doing these amazing things and it
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And so you try and inculcate some of those ways of being into your life.
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And I think that's sort of been how it is for the last 20 years.
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Yes, there are ebbs and flows because sometimes you just start, you get disappointed at what
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And some of it just seems so obviously wrong and destructive and very often many people
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like us can do nothing about it.
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So those are periods where you feel very disappointed.
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You also feel worried about where all of this is going.
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But at the same time, you know, perhaps the way to think about it is many other people
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have a say and it's a good thing that there is this conflict between various people who
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have a stake in how some of this is going and that's how it's playing out and that's
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how it should play out.
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So I think that's what keeps me going.
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And a question for both of you, but first Renuka and you would have seen it in different
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ways, partly in the same way, but Ajay being a boss and a mentor to so many people and
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additional kind of angle, which is that it is not that some people are naturally apathetic
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and some people are naturally concerned and passionate.
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I think what happens is we have both those aspects within us and then it becomes a company
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we choose to keep that also shapes us.
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You could get into a vicious cycle of apathy where no one around you gives a shit.
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So you are like, why should I give a shit?
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My work counts for nothing.
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Or you could be in a virtuous cycle where you see deeply passionate people who are like,
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shit, this stuff matters and we have to, we'll never get the credit for the work we do.
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We may never see it happening in our lifetimes.
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No one will associate it with us, but it is work that will do good and therefore we have
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So is that a correct characterization that it can either be a virtuous cycle or a vicious
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cycle and who you hang out with, who you surround yourself with can kind of determine
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that and do you feel therefore, being in the kind of space that you are makes you a fundamentally
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You could have been somebody else entirely and after you had also, like Ajay to sort
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of talk about what he's seen through a sort of a longer arc of working with people in
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I think you will find people like you and you will find those that inspire you and keep
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you going wherever you are.
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So I feel that those that are interested will find circles that give this back to them and
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be in a position where they are always thinking and always producing something.
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Ajay, does it hang by a fragile thread?
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I feel that particularly in the early years, for all of us, myself included, there is a
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great pressure to seek external validation and to climb well-established ladders.
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So other people's definitions of what is sound and what is good and what is useful and what
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constitutes success and earning respect is a very big deal.
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There are mundane problems like finding a job and getting going on some of the basics.
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So I feel it's an uphill battle for most people.
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There's a combination of the inner values and some amount of good luck on whether each
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of us will end up onto some kinds of virtuous cycles or not.
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So I feel that we in India are very poor on the institution building, on the community
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We're wasting lots of talent.
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And by default, there is just a whole world of credentialism and brand names that seems
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And by the way, most research jobs in India are driven by credentialism.
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So getting a job requires getting the right things on your resume.
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Maybe one day we should speak in detail about how that can be disrupted.
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But I remember in episode 11 of Everything is Everything, you spoke about the importance
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That both makes me hopeful that there are people who find that purpose and will do anything
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But it also makes me a little despondent because I think that we should not have to rely on
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individuals finding purpose and doing good things.
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But Amit, I feel that once you want to bring scale in anything, you will end up having
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some amount of standardization and that is inevitable.
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So there is always a trade-off between purpose and some people doing amazing things and stepping
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But it's very difficult to build scale on that.
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So even if you look at university systems overseas, which are way ahead of us, they
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have scale and therefore they have some amount of standardization and what is good and what
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is successful and what is well regarded.
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And I think that's a trade-off.
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And I don't see it as badly as Ajay does, because perhaps at least that is better than
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When we look abroad, it is indeed true that there are many organizations that work reasonably
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And they've also got an entire ecosystem worked out of the journals and the funding mechanisms.
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And what is particularly pernicious in India is the craving for the foreign journals.
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And in the humanities and social sciences, it is just dangerous because the editors and
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the referees outside have no clue about what are the important questions and what are the
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high-quality persuasive papers.
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So it hurts India particularly, whereas I respect what the French are doing for themselves.
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Their institutional apparatus, their journals, their incentives, their funding mechanisms
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are working reasonably well to scale.
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But what is happening in a lot of humanities and social sciences in India is that attempt
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at short-circuiting through the complexities of community building and saying, I want you
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to be in the American journals.
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I feel that's a truly harmful thing.
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I don't disagree with you.
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But the counterfactual is that since we don't have a local ecosystem, you will end up being
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So at least here, you have some quality metric.
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So we could argue whether that is the best place to be, but it's certainly not the worst
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And in many episodes of this show, and including with Ajay, and I perhaps got the thought first
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from him and then started thinking about it, I've spoken of what I call the academic circle
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And I'm using this term, listeners.
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He doesn't use such unparliamentary language.
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But the academic circle jerk where you are playing a game that is disconnected from reality
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and Ajay is lamented, if I understood him correctly, and I share the lament that a tremendous
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amount of talent and brainpower is lost to the world because you're playing that game
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where you want the credential, you want the tenure, you want the pubs, you want all of
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But there are real world problems which you are not addressing because you have to play
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that particular game, which may often reflect the fashions of the times in terms of the
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kind of work you do, and not really real world problems.
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And Ajay's story is kind of documented through all the episodes I've had with him and we
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of course do everything is everything every week.
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Everything is everything every week.
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But in your case, Renuka, have you ever felt different pulls towards one direction or the
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Because the direction you've chosen, in a sense, there are other directions which could
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have paid you much more.
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And there are other directions also which could have gotten you, you know, perhaps greater
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glory of a different sort within the limited academic world or whatever.
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And yet you choose to work in a field where it is going to be very hard for anyone outside
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this field to understand when you say, I did that.
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So what's it been like for you?
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Well, very often you can't say that I did that because you alone never do anything.
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You're always part of a larger group of people.
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And even that is often not known that you were part of something bigger.
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But it has not really bothered me too much.
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I, you know, there are obviously points in time where you do feel the pressure of wanting
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to be regarded by a certain set of people.
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But you get over that very quickly because I've always loved and valued what I am doing.
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And I'm lucky enough to be a part of a circle that does appreciate this.
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So it's not as if I'm this lone warrior who is just doing something because she believes
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And then there is no feedback mechanism.
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So there is, it's very important to have a feedback mechanism.
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It's very important to have a community that values what you do.
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Which helps you disregard, you know, other communities.
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And I've been fortunate to have that.
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So I want to spend a few hours digging into the details of that and we shall do that someday.
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But to kind of get to the subject at hand today, which is such an urgent and important
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subject and I'm hoping that what we discussed today can sort of act as both an introduction
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and a resource to that subject at hand.
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Ajay, give me a brief introduction to this subject at a very meta level.
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Like what are pensions?
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Tell me a little bit about the origin of the thinking behind them because it's one of these
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words and one of these concepts which we normalize, right?
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I have never thought about it for even 60 seconds at a time.
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You kind of grow up and you think, ah, pensions, okay, when people retire, they get a pension
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and maybe the government pays it.
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Maybe they kind of contribute it and et cetera, et cetera, and no one's really quite sure
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But when you're young, why the hell should you care?
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You're a long way from growing old and you don't think about larger issues as well about,
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you know, how it can become a political tool, how it has an impact on state finances and
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therefore all our money because what after all our state finances, but our money, you
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know, and why it should lead to the kind of enormous crisis that it has.
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But I want to step back a bit.
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You're speaking to someone who knows, which is me, who knows absolutely zero about this
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Give me a big, give me an introduction.
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So let's start step by step.
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In the olden days, let's think 19th century, before antibiotics, life expectancy was low
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and most work was manual labor.
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It involved physical strength.
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So people would reach the end of their lives, in the end of their working lives and lose
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the ability to have that level of physical strength.
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And then they would live for a short time before they would die.
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So there was that zone of retirement where there were only a few years left.
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And just to fix intuition, imagine that you stop working at about 55 and you die at about
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Because we're discussing a five-year problem that people lost the ability to do physical
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labor by about 55 and they lasted for about five years or seven years after that.
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This is a typical 19th century configuration.
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Ever since prehistory, the elderly have lived at home, been supported by children and grandchildren.
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And that was the normal way in which people found social support and community and financial
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support and caregiving in the last years of their life.
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In Bismarck's Germany, there was a port where the port workers invented a concept.
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They came up with this idea that when the person stops working, they take the last wage
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of that person, suppose it's a hundred rupees, and focus on half of that wage.
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So it's about 50 rupees a month.
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And this half wage was paid to the person until they died.
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And this money was contributed by all active workers.
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The workers got together and funded the support of a few elderly people.
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And there were only a few elderly people because they died relatively quickly.
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This immediately takes us to the word dependency ratio, which is the number of working people
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versus the number of retired people.
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So here for the first time, you got a new concept around retirement, that there was
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a systematic mechanism to pay a person half their terminal wage until they died.
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And there was a funding mechanism that this was taken from the person's then living.
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So this was the world's first formal conception of pensions.
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So does this mean just to clarify how it would work, say Renuka and I are working and you're
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about to retire and all you retire, let's say.
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So every month a little bit of our income is taken, say 2%.
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And that then goes into funding the very few elderly people who they are.
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And chances are that out of Renuka and I, 1.5 of the two of us will probably die anyway
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before we reach that age.
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So the burden on the actual active workers will be very small.
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And also the active workers are given this nice promise that look, when you get old,
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So there's a certain justice about that, that when I'm young, I'm funding old people.
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And when I become old, the future young will fund me.
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And was this mandated by the state or would organizations themselves institute?
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This began literally as a labor initiative and gradually started becoming more and more
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So I'm right at the very beginning.
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This was the first pension.
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And then this became more and more formalized.
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Particular importance for us is that this became a part of the British civil service.
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And through that, it came to India.
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That civil servant, like your father, would retire originally at 58 and then at 60.
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And then they would be paid 50% of their wage until they died.
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So this is the early conception of pension.
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And there is a technical word for this.
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It's called a defined benefit pension.
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Because that benefit, 50 rupees, is defined.
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So on I finish work with a wage of 100, I'm guaranteed that there will be a pension of
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50, 50, 50, 50 until I die.
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There's no income uncertainty for the old person until they die.
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There may be health care expenditure uncertainty.
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There will be many other kinds of uncertainty.
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There's of course, longevity risk.
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But this part is guaranteed.
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And it was called a defined benefit pension.
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Couple of quick questions.
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One is, and I'm making assumptions, tell me if they're correct.
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And one assumption is that in these times and before these times, before we achieve
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the kind of prosperity that we have in modern times, most people would have been living
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pretty much a month at a time.
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And therefore, you know, the elderly, if their kids take care of them, and I'm guessing that
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family structures also then play into that.
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So with greater prosperity, that family structure may no longer be required.
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But at the same time, so, you know, that's one assumption I'm making.
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And the other assumption I'm making is that it would have been attractive to a worker
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a company that offers pensions because people weren't skipping jobs all the time.
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If you joined a factory, I'm guessing you would work.
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There's a chance that you might retire there.
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And therefore, it is attractive to you that there is a pension scheme.
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So many rabbit holes to go into.
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I shall be very disciplined.
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I shall give you one line answers.
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We just point to the rabbit hole.
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OK, so you said a person joins a company
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and would be attracted to getting that pension.
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Now, immediately, you've got to worry about several things.
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First, what if a person moves jobs?
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So now you want something more complicated that if I work five years for this company
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and seven years for that company, in a way, you want to attach a liability to those companies
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and take money somehow from them when I am retired.
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And in developed countries, these kinds of things have been attempted.
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And this is the way in which the state gets into these structures.
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The second thing is you talked about the word family.
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It sounds cold and cruel, but you know what?
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Parents respond to incentives.
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Does that seem like a revolutionary idea?
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So actually, when formal sector pension provisions come about,
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then the behavior of parents towards children, of children towards parents does change.
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So parents are less inclined to build a portfolio of children
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when they can build a portfolio of financial wealth.
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And I promised only one sentence, but I cannot resist one more sentence.
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Did you know, did you know, did you know
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if a parent converts a stock of wealth into a flow of monthly pensions,
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then the wealth is gone and the parent is getting a flow of pensions until they die.
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So there's less money available to bequeath.
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Such parents, on average, get fewer visits from their children.
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And it also plays to that old thing about how the poor tend to have more children.
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And I use this as an and one reason, obviously, is insurance.
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They can afford, they can't afford such good health care.
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And therefore, child mortality and all of that is a factor.
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But also the poor have more children because children are a resource,
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you know, which gives a lie to the popular notion that population is a bad thing.
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The poor have more kids because they need more resources.
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And what you're saying here is that the promise of a pension is a future resource.
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Then the pressure on you to have kids goes down.
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And equally, the kids are also responding to incentives.
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So we're dealing with fundamental features of the human life.
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We are discussing all through the working years
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where there is some way in which resources go away from the young.
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There are a couple of different ways to organize it.
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And then you come to retirement and the relationship with children,
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the relationship with formal promises of pension until death.
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So these are very important questions which shape everybody.
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Renuka joked about being a young person who was interested in pensions.
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It is unfortunately pretty universally true that people in their 20s believe they're going to live forever.
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No, on the contrary, people in their 20s will often tell me that I think I'm only going to live till 60.
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Because, you know, I don't want to live longer and I don't want to be old.
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That's fashionable, but no one buys that.
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I was like, you know, when I was 18, I thought I want to die at 27,
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because that's when all the rock stars died, right?
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Jimi Hendrix, Jim Morris and all that.
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Then later, I thought when I was 22, I thought, no, not five more years, 33,
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because a whole bunch of others died then.
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So you kind of romanticize this.
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And, you know, to me, through the 18-year-old me,
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it would have been astonishing and terribly sad that the 49-year-old me is sitting here right now.
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Exactly. But you can see how that shapes your investment and portfolio choices,
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because at that age, you don't see how long you're going to live.
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In fact, if you ask 40-year-olds today, they will tell you that they want to be done with by 75.
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Which is completely wrong.
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So longevity has gone, as we've discussed many times.
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So Professor Sahne is going to live and live to, you know, 110 years.
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What is the difference between live and live and live and live?
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Just keep plodding on. Just it goes on and on. 110 is like...
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So not just live, but also live life in all its full glory and all of that.
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No, you know, I'm still, I'm kind of staggered by this notion that a thing like pension,
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which seems such a dry financial arrangement, can actually change the structure of society
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in terms of how many children people have and how those children treat their parents and just...
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And how the parents treat their children. So these are fundamental things.
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So pensions is so important. It reshapes society.
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I'm going to rapidly talk about how it involves staggering amounts of money.
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You don't have to be too rapid.
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Comes with many dangers.
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This is not everything is everything. This is the seen and the unseen.
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But I did want to say that this stuff is fundamental and it has huge ramifications for everybody.
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So let's continue with the narrative that you were on.
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So Bismarck institutes this. It is initially something that labor pushes for.
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Then gradually it gets formalized and it becomes almost a new normal in a sense.
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And it becomes part of the workplace.
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But all these complexities are also coming up.
#
What if I shift jobs from one company to the other?
#
And then over a period of time, of course, what if people live longer and etc, etc.
#
So there is a whole bunch of problems here.
#
For simplicity, for starters, let's stick to civil service.
#
So I don't want to get into multiple employers.
#
You will see as we tell the story.
#
Actually, there is a beautiful solution for all these problems.
#
But just to understand the problems and how they unfold, let's stick to civil service.
#
The British brought the traditional civil service pension into India,
#
what is now called OPS, the old pension system, which is 50% of your terminal wage.
#
Now, what is the value of this pension?
#
So being as a finance person, if you stand at age 60
#
and think of a list of promises where there is a payment of 50 rupees happening every month
#
going on until death, and death is itself an uncertain process.
#
You're going to die at some point with various probabilities.
#
So we attach probabilities of survival till time t,
#
and there are promises and you can NPV all that and you get the actual value of the promise.
#
And so what is the value of this promise?
#
It obviously varies enormously with longevity.
#
So in a world where people would retire at 58 and die by 65,
#
then there's really nothing much going on.
#
It's a small amount of money.
#
But then longevity exploded.
#
An important thing to remember in India is that civil servants
#
are really top decile people in India.
#
There are no poor people who become civil servants.
#
The bulk of civil servants are from the top quartile, top decile of society.
#
These are the people who have the best mortality of India.
#
They're going to live the most.
#
So when you take population averages, it lulls us into complacence.
#
When you take the average life expectancy at 60 in the general population,
#
it seems like a small number.
#
But by the time you're getting to top quartile, top decile people,
#
you are discussing better health, better knowledge, better access to health care,
#
and then the residual years left after age 60 become longer and longer.
#
As you go down that route, the value of that promise balloons.
#
In this, we have to deal with the question of indexation.
#
There are three kinds of indexation that we need to think about and understand.
#
So one kind of pension is a nominal promise.
#
I just promise you 50 rupees.
#
And when inflation comes, the 50 gets whittled away.
#
So that is the first kind of pension that can be done.
#
It should be on the table.
#
It should be considered.
#
Now, this takes us to macroeconomic stability.
#
In the olden days in India, inflation was much more unpredictable.
#
Every now and then, there would be an inflation surge,
#
and the value of the rupee would be whittled down.
#
In 2015, the Reserve Bank of India got a formal mandate
#
to live on an inflation target of 4%.
#
So now, hopefully, to the extent that RBI is able to rise to this challenge,
#
people are protected into the deep future,
#
saying there's a predictable 4% inflation.
#
but it's something that you can predict and you can plan around.
#
And then maybe there is a role for a nominal pension,
#
where the 50 rupees declines in value every year at a 4% rate
#
because the inflation hits the bullseye every year and gets to 4%.
#
The second world is that the pension is inflation-indexed.
#
Now, this is very expensive.
#
It means the pension is bumped up by 4% every year
#
or whatever is the inflation rate.
#
This is a different ballgame altogether.
#
So now, when you NPV this product,
#
it is resulting in vastly greater expenditure for the pension giver
#
because over a 20, 30, 40-year horizon,
#
you're bumping up the payment by either 4% if RBI hits the bullseye
#
or whatever inflation may be,
#
depending on how badly RBI fails to hit the bullseye.
#
So this is a different product.
#
It's a much more expensive product.
#
And finally, the third and the costliest idea is called wage indexing.
#
So this is the idea that imagine I retire as a secretary to the government.
#
Now, my pension is set to 50% of the secretary to government,
#
but I'm going to live for 30 years more.
#
Now, through those 30 years,
#
every time the wage of a secretary to government goes up,
#
my pension is bumped up to remain at 50%
#
of the wage of a secretary to government at a future date.
#
That's a phenomenally expensive pension
#
because now you're factoring in GDP growth into the pension.
#
So the wage of the secretary will grow with Indian GDP.
#
It's going to grow at a hectic rate compared to inflation.
#
There'll be real growth in the wage of a secretary to government
#
because India is experiencing GDP growth.
#
So this is a different level of promise altogether.
#
Many people are a little glib about these differences.
#
And I don't want to burden this show with numbers,
#
but I just want to give you a qualitative flavor
#
that the cost of these three things is chalk and cheese.
#
They are often mixed up and people casually suggest
#
that you should do wage indexing or you should do price indexing
#
or you should do no indexing,
#
but each of these three implies profoundly different numbers.
#
So this is something to keep in mind.
#
It's going to come up in a lot of the post-2004 debacle
#
surrounding pensions that Renuka is going to talk about further.
#
Also, while we are talking about longevity,
#
very often pensions are not just given to that person,
#
but also promised to the spouse of that person.
#
And so when we start thinking about longevity,
#
it is not just the longevity of the person,
#
but now the longevity of two people.
#
So you can see how it just keeps going on into the future.
#
So now with a certain probability, the spouse will outlive the other.
#
If you think of in the patriarchy, on average,
#
the male is four years older than the woman and women have higher longevity.
#
So now you're adding more years of a pensions journey
#
that makes it more expensive.
#
So before we come to the implications of this,
#
another further really basic meta question,
#
we often take the structure of things for granted,
#
And to me it seems that,
#
and correct me if I'm wrong because I'm thinking aloud,
#
but to me it seems that the pensions exist
#
because people are really bad at financial planning.
#
They don't understand mortality and longevity
#
and what to do with money.
#
And also, as Renuka said,
#
that, you know, we have this illusion of,
#
you know, the young thing, they'll never get old.
#
And there's also this illusion of immortality where,
#
like one, there's an illusion of immortality
#
where you behave as if you're never going to die.
#
And therefore you don't plan for death and old age
#
and all of those things.
#
But you also have this sense that,
#
that retirement and old age are a long way away.
#
And therefore pension seems to be,
#
to be a sort of a good broader way to account for this.
#
That individuals won't plan, can't plan,
#
may be irresponsible, may be whatever.
#
It's a human, it's a basic human failing
#
or the brain can't comprehend large numbers.
#
And therefore here is this institutionalized solution
#
which kind of takes care of the matter.
#
But it makes me wonder if there are,
#
you know, this one happened to arise.
#
Bismarck did something, it spreads from there,
#
convention spreads, you know, memetic factors take over.
#
But are there, you know, other kind of arrangements
#
which could possibly have evolved?
#
Was it an accident of history or was it inevitable
#
that at some point we would have something like this?
#
What could a different, better way of looking at
#
this whole subject of how do humans plan
#
for their old age have come about?
#
I want to straight away jump into today's pension problem
#
and how people in working age today
#
should think about their future.
#
There is a lot of evidence that shows us
#
that that abrupt transition into retirement
#
That when people stop working
#
it has tremendous adverse consequences
#
both in terms of the physical exercise
#
of moving around and doing some work in the day
#
and also the whole psychic problem
#
of them being alone and being uninteresting
#
and unimportant and nobody wants to talk to you
#
and you're not useful or valuable to anybody.
#
These two things come together
#
and in many countries we have seen this data
#
that it all sounds very romantic.
#
Oh, I'm going to retire, I'll travel a bit
#
in six months, nine months that peters out
#
and then people rapidly get to health collapses
#
and land up in old age nursing homes or die.
#
So retirement is a curse
#
and I think most people have not adequately understood that.
#
The idea of putting your boots up and retiring
#
is actually something that should be considered aberrant
#
and I think it is just a complete social blunder
#
in somehow normalizing it and making it something
#
that is venerated and something that is attractive.
#
I feel it is a bad thing for everybody.
#
So what is a desirable life design
#
for all of us, for all our viewers?
#
The desirable life design is that
#
there should be a gradual tailing off of work
#
based on physical capabilities.
#
So that regimented nine to five full-time job
#
with one employer has a finite window
#
and sooner or later everybody should get out of it.
#
Meaning you pick what age you want to walk out of that.
#
Some lucky souls like you have essentially never done that.
#
I've done it for a while.
#
So I think it's a rite of passage.
#
We've all got to do it for some time
#
but the sooner you can get out of that
#
and live a much more open-ended, flexible, creative life,
#
And then the critical thing it does is it creates flexibility.
#
So I feel as we get older and as physical incapacity creeps in,
#
not it creeps in, it's seldom abrupt.
#
Physical incapacity creeps in.
#
Then we should dynamically reduce our labor supply
#
and do fewer hours a week
#
and do the things that we consider interesting.
#
And that way labor supply tails off into old age
#
and doesn't abruptly go to zero at age 60.
#
And people are vigorous.
#
They are physically energetic.
#
People are moving around.
#
It's great for their health.
#
There are people who want them to do some work for them.
#
It is just great for the physical and mental health.
#
For every older person that I love,
#
I dream that they will keep on doing some amount of labor supply until they die.
#
This thing about tailing off and dropping to retirement
#
is an industrial revolution concept.
#
It is a curse in the modern world.
#
I would wish it on nobody.
#
I have two related questions.
#
One leading on for the other, for both of you.
#
And one is that what you describe is it seems to me
#
something that you and I can do.
#
That as we grow frailer,
#
we can prioritize what we want to do with our lives
#
and we can reduce our labor supply as we put it
#
and we can figure that stuff out.
#
But we're incredibly privileged.
#
I think a lot of people who are,
#
especially in poorer countries like India and so on,
#
who are living hand-to-mouth existences and all of that,
#
they don't really have a choice in the matter.
#
If there is mandated retirement,
#
it is incredibly painful and horrible
#
in all the ways that you describe,
#
both financial and psychological.
#
They don't have that choice open to them.
#
This is question one and question two,
#
which I'd like to know what both of you think about it.
#
What you spoke about, Ajay,
#
is that loss of purpose at one level,
#
dignity at another level.
#
After you retire, you don't have work.
#
You're no longer important.
#
And you don't have that structure to your day.
#
All your life you've had a structure to your day,
#
a structure to your week.
#
You no longer have structure.
#
And that can be absolutely freaking horrible.
#
And supposing we get past the implicit problem
#
in the first question and get to a point
#
where there is enough prosperity in the world,
#
let's say AI takes productivity so high
#
that the state can afford a massive UBI
#
and none of us have to work again.
#
Nobody has to work again.
#
But yet, in this scenario,
#
what people will often say is that work still has value.
#
Work is not just about earning money.
#
So what are your thoughts on that?
#
How would you react to that sort of situation
#
where you don't have to work for a living?
#
humanity would react to such a situation?
#
So first, I want to get on the poverty question.
#
That poverty is a terrible problem.
#
That's unconditionally true.
#
And the single highest purpose for all of us in India
#
should be to figure out how to become an advanced economy
#
so that some of that brute grinding poverty goes away.
#
Everything I am saying is about questions like
#
100 rupees a month of income versus 50 rupees a month of pension.
#
And maybe 100 is a terrible place to be.
#
Maybe 50 is a terrible place to be.
#
We are not here to solve that.
#
So just keep the poverty discussion separate
#
from the pensions discussion.
#
The pensions discussion is a percentage of your last income.
#
And so if you are poor,
#
a small fraction of a bad number is a bad number.
#
I think that when we are talking about pensions
#
and pensions being 50% of the last wage,
#
it applies to a very small section of the population,
#
because only civil servants get that pension.
#
And perhaps people in larger formal sector organizations
#
are part of some other program where they get something
#
at the end of their working life.
#
So I think this question of,
#
if you look at the large part of India,
#
it's irrelevant because nobody is getting 50% of last wage.
#
And even on the question of work and this idea of retirement,
#
it only applies to those who have a job
#
where there is a retirement age.
#
Most of India does not have jobs.
#
And therefore, the relevant question is,
#
at what age would you withdraw from the labor force?
#
And not at what age you retire,
#
because retire is very much a function
#
of some formal sector employment
#
where there is some last date of work
#
after which you will get something
#
from your employer or from the state.
#
So in India, if you are a fruit seller
#
or a chartered accountant or a podcaster
#
or a myriad of self-employed roles,
#
there is no concept of retirement date.
#
And there is that flexibility of gradually phasing out work
#
in the formal sector where there are proper nine to five jobs.
#
I will import a little bit of the first world discourse.
#
The first world discourse is that the institutions
#
of the labor market need to change,
#
reflecting aging societies and create much more flexibility
#
whereby older people can participate in the labor force
#
where older people are able to do a half day
#
And everything in society should be adjusting to fit that
#
because as the aging of society happens,
#
it's a single gigantic problem
#
which should drive changes in other things.
#
It's the institutions of the labor market
#
that should change in response to the needs of an aging society.
#
But Ajay, if you take that and say that look,
#
in 80% of the workforce of India,
#
we are already in a place where the labor market conditions exist,
#
that nothing stops you from working
#
and as long as your health permits, you can continue to work.
#
I want to sort of respond to the question that Amit asked before,
#
which is what is the system that you would want
#
in an environment like that?
#
And I think that's where this whole question of building up wealth
#
and then drawing down wealth
#
whenever you are not able to work becomes important.
#
And I think that too much of the pensions discourse
#
has been hogged by the problems of longevity
#
of a certain class of people who get that benefit.
#
And much less is thought about the larger question
#
of how do you build wealth
#
so that you can finance consumption in old age.
#
And I think that we need to broaden the pensions discourse
#
to a larger saving discourse,
#
to a larger portfolio optimization discourse
#
and to a larger question of how will you draw down that wealth.
#
So sure, I worked till I'm 70
#
and I've accumulated this pot of money
#
because I was diligent and I saved in some instrument.
#
But now I might live for 30 years, 40 years, 50 years, who knows.
#
How do I draw down that wealth?
#
And I think that we haven't focused as much on those questions
#
when it comes to pensions.
#
And rightly so because the problem staring us in the face
#
is really the problem of making these promises
#
to a small section of society
#
which we are most likely not going to be able to fulfill.
#
So civil servants are a tiny fraction of the Indian labor force
#
but unfortunately from 1999 till today
#
we are stuck on solving that.
#
And in fact, we've taken many steps backwards
#
in retreating from what was thought to be a damn decent solution.
#
And we'll go into the weeds of all of that
#
but just responding to what you said, Renuka,
#
it strikes me that those two problems,
#
shifting from the problems of thinking about pensions
#
for a limited group of people to widening the scope
#
to thinking about savings in general
#
and how we plan for our future,
#
they seem to be in different domains.
#
The first one is sort of in an institutional domain
#
where the political economy is involved
#
and where institutions are involved.
#
And the second one seems to be more in a cultural domain
#
of how individuals think about their future
#
and how they change their behavior.
#
And we often act like herds.
#
So there is a chance that one individual at a time
#
suddenly, you know, memetic desire takes over
#
and, you know, people begin to think differently en masse.
#
But I would imagine that given that we are hardwired in ways
#
where, you know, we have that bias for optimism
#
and in a particular context
#
and inability to grok large numbers,
#
that cultural change to me seems very difficult
#
but that's an aside, I mean.
#
Yeah, but Amit, I'll respond as you guys have often said
#
that culture is also a response to incentives and institutions.
#
And the pensions community has done that
#
and, you know, I can quibble about what they've done
#
and what their focus has been
#
when it comes to quote-unquote informal sector pensions.
#
But there is a move to get people to save more
#
or bind people to accounts that are called pension accounts
#
just because they are illiquid.
#
So once you enter that,
#
you can't touch that money for the next 30-40 years.
#
And that's one way that you force people
#
to put some money aside for pensions.
#
And there are institutional structures that do that
#
and that's the response to the culture question.
#
No, in fact, I agree with you.
#
I was just thinking aloud what Ajay said earlier
#
about how pensions, when they first came,
#
provoked people to have less children
#
as an example of culture and cultural and social attitudes
#
and norms being influenced by an institutional mechanism.
#
You know, even in this regard, I'm thinking
#
let's take two wild thought experiments.
#
In one wild thought experiment, you guarantee everyone,
#
forget the, you know, the fiscal practicality of it,
#
but you guarantee everyone 200% pension after they retire.
#
Whatever the last salary was,
#
they'll get double of that a month.
#
You know, their incentive to save
#
has basically shot down drastically
#
and that will shape or reshape
#
a lot of the cultural and social attitudes.
#
And vice versa, if you, in other thought experiment,
#
you abolish pension entirely.
#
Then the incentive to save and so on.
#
So their attitudes towards money
#
just go to a whole different level.
#
The attitude towards consumption,
#
how they live their lives,
#
everything can change because of minor shifts in, you know.
#
Yeah, pensions is that important.
#
Pensions can reshape an entire society.
#
And I'm going to come to it in a moment.
#
The magnitudes of the money involved are so massive,
#
it can bankrupt the government.
#
So pension promises like health promises
#
are the two biggies which can destroy
#
the fiscal soundness of even developed country governments
#
leave alone a much fiscally weaker government like India.
#
So you've come very far in the narrative
#
and I want to go back to that early part,
#
the first evolution of pensions that you described
#
is that people who are working
#
are paying for those who have retired
#
who probably have four or five years to go
#
and you know, most workers don't get there.
#
But this begins to change in fundamental ways.
#
One is you try to scale this up to bigger groups of people.
#
Longevity goes up, so the people are living longer.
#
Fertility rates change.
#
The proportion of young to old in the workforce
#
And then shit starts going out of whack
#
and the numbers become hard to control
#
because initially it's pay as you go, right?
#
Yeah, and you used a phrase, let's define it carefully.
#
There are two ways to implement a defined benefit pension.
#
Case one, I'm the government, okay?
#
So let's just discuss civil servants
#
and governments for right now.
#
Case one, the government has salted money away
#
upfront that pre-funds the payments
#
that are made to the person who's about to retire.
#
So that money is locked away
#
and is kept safely ahead of time.
#
That would be very nice because it removes all financial risk.
#
But the alternative that most governments do
#
is called pay as you go,
#
which is like my Bismarck example,
#
You've not salted away the money ahead of time.
#
You've not created a block of money
#
that will pay for the pensions at future dates.
#
What you plan to do is at a future date,
#
whatever money I need for pensions,
#
I'll go get it from the young at that time
#
or to come to the Indian civil service situation.
#
Whatever is the money required for pensions,
#
we'll just put it on the general budget.
#
We will keep taxing the people.
#
We'll extract money from the people to pay for that pension.
#
This is called a pay as you go pension.
#
This starts becoming more troublesome
#
because now you can be quite reckless.
#
There is no real cost calculus.
#
Now the forces that are tugging at the pension system
#
that you described, the longevity is going up.
#
The demographic structure of the workforce is changing.
#
These forces start yanking at the financial viability
#
and the financial sanity of a pension arrangement.
#
And there's really no force to pull back to sanity.
#
This is where India found itself through the 80s and the 90s.
#
Through the 80s and the 90s,
#
there was this kind of pay as you go pension
#
that people would retire every year.
#
The 50% pension was being paid to them
#
and it was funded out of general tax revenues.
#
Somewhere down the line,
#
the pay commissions became very generous.
#
They started giving inflation indexation of the pensions.
#
So suddenly the pension started growing much faster
#
than meets the eye because you're being indexed for inflation.
#
And people started living longer.
#
After a great upsurge of recruitment in the 60s and 70s,
#
recruitment slowed down considerably by the mid 80s.
#
So then the ratio of the old who are getting pensions
#
versus the young workers who are inside the government
#
started becoming more and more adverse.
#
So all these things came together
#
and it got crystallized in one number.
#
On budget, year after year,
#
you saw explosive growth in the pension outcome.
#
This was starkly visible by the 90s
#
and people started doing simple mechanical extrapolation
#
without a whole deal of data and analysis.
#
But it became blindingly obvious
#
that this thing is unsustainable,
#
that this was growing at 15-18% a year
#
while the general government revenues
#
and expenditures were growing at 10-11% a year.
#
These kinds of mismatches lead to very large divergences
#
and this is the kind of bind
#
that the Indian state found itself in the late 90s.
#
Explain that 15-18% number to me
#
because if it's say inflation indexed
#
and say inflation is 5%, then fine.
#
If you're getting 50 rupees spend,
#
if a particular guy retired at 100 rupees,
#
he's getting 50 rupees pension,
#
that becomes 52.5 the next year
#
and then 55 points something the year after that.
#
So this is inflation indexing
#
but was it also wage indexing
#
or is it the number of people going up
#
that also increases the wage bill
#
and takes it up to, you know?
#
It was primarily about the demographic structure
#
that when there was a big surge in recruitment at 21,
#
many years later, a whole bunch of people would retire.
#
There was also petty fraud.
#
So railways was famous for paying pensions
#
to lots of people who don't exist.
#
So there's a mixture of...
#
Also the pay commission rises.
#
So when you are in a system
#
where your pension is 50% of your last wage
#
or last 10 months wage,
#
then if towards the end of your working career
#
there is a pay commission
#
and you suddenly get a hike,
#
then instead of 100 as your last wage,
#
And so your pension for this cohort now
#
instead of being 50 is 100.
#
And so their incentives,
#
they are the senior most civil servants
#
who are running the civil service.
#
So their incentives are always to
#
lobby the pay commission to give them higher hikes
#
and who mans the pay commission?
#
It's supposed to be a neutral technical body,
#
but all too often pay commissions
#
have had a very welfarist approach
#
of trying to dole out more benefits
#
rather than thinking hard-headedly
#
about these consequences.
#
Continuing on what she just said,
#
there is another kind of behavior
#
that's been normalized in the Indian state.
#
A person is coming closer to retirement.
#
It is considered a nice gesture
#
to give that person one last promotion
#
because you basically get a higher pension forever
#
because the pension is 50% of your last wage.
#
So very late in the career,
#
it's a gesture that the good people
#
get one more promotion towards the end.
#
So all these factors came together
#
and by the 90s, it was visible
#
that there was an explosive growth in pensions.
#
Just to make this more fun,
#
the late 90s was also a terrible time in the economy.
#
The Asian crisis emerged in August 1997.
#
Vajpayee tested a nuclear device in May 1998
#
and there were sanctions against India
#
from all over the world.
#
there was quite some fiscal stress.
#
And we started seeing many state governments
#
renege on pension payments to old people.
#
And this takes me to the glorious question
#
of how guaranteed is a guarantee?
#
It sounds very easy to say
#
the government has guaranteed.
#
It's like the question,
#
who will watch the watchman?
#
And defined benefit pensions
#
It is just in the nature of the beast
#
that the political economy is such
#
that there is a concentrated interest
#
in a small group of people.
#
And in this case, civil servants,
#
a very influential group of people
#
and get atrocious promises made to themselves.
#
But those promises are fundamentally unaffordable.
#
governments just failed to pay those pensions.
#
We found so much evidence by the late 90s
#
of a couple of state governments of India
#
just failing to pay pensions.
#
And so then you start thinking
#
that what is the point of a fancy promise
#
if it is actually not upheld?
#
What is worse than the uncertainty
#
I have a very good-looking pension.
#
I'm not sure that the money will come.
#
Now suddenly, you're back to square A.
#
That you have to actually self-insure.
#
You have to create your own financial wealth.
#
You can't trust these institutions.
#
that this is just a third-world problem.
#
I mean, yes, of course,
#
India is a third-world country
#
and we have such minor third-world problems.
#
many, many first-world countries
#
have reneged on defined benefit pension promises
#
It's a bit non-comparable
#
that those promises were made to the population.
#
we're only discussing the civil service.
#
But still, in first-world countries,
#
there are numerous episodes
#
where the government has just stood in front of the people
#
and said, sorry, I can't afford this
#
and I'm going to renege on the old people.
#
There are shades of gray to reneging
#
because one way you do that
#
is by changing certain parameters
#
of the pensions you get.
#
So one is you just increase retirement age.
#
So instead of retiring at 60,
#
now you retire at 65 or you retire at 70.
#
And in the OECD countries,
#
you're seeing that retirement age
#
is constantly being bumped up.
#
So in some ways, it is reneging
#
because earlier you thought
#
that you only had to work till you were 60,
#
but slowly you're seeing that
#
your working life is going up.
#
And then there are other ways
#
in terms of the kinds of,
#
it's not that your pension goes to zero,
#
but there are ways in which it is made lower
#
than what you thought you would get.
#
But just, this is a puzzle that I,
#
it's a question that if government has reneged
#
and we know that it has,
#
how is it that civil servants don't see it?
#
Because in my experience,
#
I have not come across a single civil servant
#
who says that, you know what,
#
this might get us into trouble
#
and I don't trust the state
#
and who knows what might happen.
#
And so perhaps let's change this conversation
#
to something where we have
#
a little bit more funding
#
or a little bit more transparency
#
on where the money is coming from
#
But somehow that discussion
#
in the class of civil servants
#
or certainly the ones that we speak to
#
are just so confident that this time around
#
it's impossible that the state will not pay us.
#
So before we get to that question,
#
I want to ask a question that takes a step back.
#
I want to take a little digression
#
and I'll go on a mini rant
#
because what is life without rants and digressions?
#
You mentioned about how it became almost custom
#
that oh, so and so is retiring
#
and my promotion there though,
#
higher pension and all that.
#
And this reminds me of Milton Friedman's
#
famous formulation of the different ways
#
four ways of spending money.
#
And he had kind of made a table.
#
I'll link it from the show notes.
#
And it depends on like,
#
you can spend your money
#
or someone else's money
#
and you can spend it on yourself
#
And if you're spending your money on yourself,
#
you obviously economize
#
and you seek the highest value.
#
You know, you don't want to spend too much
#
If you're spending your money on someone else,
#
you economize because you
#
don't want to spend too much money
#
but you don't seek the highest value
#
because you're spending on someone else.
#
If you're spending someone else's money
#
and you seek the highest value.
#
Because you don't care about how
#
But you want the value.
#
And if you're spending someone else's money
#
then you don't economize
#
and you don't seek the highest value.
#
So often I, you know, cite this in the context of government spending on the general population,
#
that they're spending someone else's money on someone else and they don't give a shit
#
and they don't economize or spend value. But in this case, they're actually spending someone
#
else's money on themselves because they are the beneficiaries. So they'll seek the highest value
#
and they won't economize, which leads us into this terrible vicious spiral.
#
And my question here, before we go on to the question of why don't civil servants think more
#
about the possibility of reneging, my question here is that in India, if this whole pensions
#
debate applies only to civil servants, you know, one way of thinking about that, in fact,
#
my instinctive way at one point of thinking about that, which is clearly wrong, would have been to
#
say it's a small percentage of people who gives a shit, let them do whatever, as long as they don't
#
interfere with our freedoms. But what you're pointing out is yes, it's a small percentage of
#
people, but it has an enormous impact on the rest of the country. So I want you to spell that out
#
for me that why were states reneging? Why were there failures? What are the amounts and percentages
#
involved? I want to say two things. The first is your immediate question. The numbers were pretty
#
large. They had gone up 8, 9, 10, 11% of the government's expenditure and clocking up at a
#
scary rate. There's a very important paper that all of us had worked on in that period. It is
#
authored by Surendra Dawe and Gautam Bharadwaj, where household survey data was used to estimate
#
the presence of civil servants and pensioners in the economy. And the NPV of their pension
#
was calculated, net present value. So you take the promises going deep into the future,
#
you take into account the present estimates about mortality, and you add up all those
#
future things, probability weighted and discounted into the present. And the
#
calculations used a wrong method, an over-optimistic method on the mortality.
#
So there's a long story. It was a backward-looking mortality table because in the future,
#
mortality will improve. The data that was used for that paper was a backward-looking mortality
#
table, the mortality experience of India of the last 30 years. In the next 30 years, it will always
#
be the case that you're going to live longer. And that paper found a very big important fact.
#
It found that the net present value of the promises to civil servants alone were about
#
3% of the population, was 68% of GDP. 3% of the population getting 68% of GDP.
#
As the value of the promise. That if you fully funded the promises made to all workers and all
#
pensioners today, what was the size of the fund you would need to pay for all those promises?
#
Which year was this paper and what was it? Which time was it measured?
#
Okay, this paper was written in 2003. So we can quibble about the exact methods and
#
it goes in a couple of different ways. I think the truth is a bit higher because of this
#
forward-looking, backward-looking problem. But any which way you cut it, it was an eye-opener
#
that 3% of the population was grabbing something that was worth 68% of GDP. That's just a no-no.
#
So I don't think anybody would accept that there is an implicit debt, there is an implicit burden
#
upon the Indian state of 68% of GDP on account of this. So I think these two things came together.
#
One was just that year after year strong compound growth of the pension payments.
#
The second was this evidence about the magnitude of the pension promise to 3% of the workers.
#
These two things came together and created a call for action.
#
I think there was one more thing and it's this 3% number that if only 3% people and plus if you add
#
the EPFO folks, that's the formal sector, it came to about 12% of the population.
#
There was a lot of concern that what are we doing for those that are not covered by these
#
pensions. I think in this entire NPS reform movement, I think there was a big push on,
#
in fact, it was housed in the Ministry of Social Justice and Empowerment to begin with. It was not
#
a civil services question. So if 3% is going to cost 68%, it's non-scalable. You can't take it
#
to 30% of the population because 680% of GDP. So what Renuka was saying is absolutely right.
#
The thinkers of that period were saying, what institutional arrangements can we create that
#
will work for the population? Then they needed to be profoundly different. And then this brings me
#
back to what you were saying earlier that it's important to think of dog fooding. Civil servants
#
are that entitled elite getting a very good deal on their pensions and they are educated,
#
they are sophisticated. So it is only right that a pension reform should start from civil servants.
#
So if you build a new system and it is proven and it works for civil servants, then in good faith,
#
we are able to offer it to everybody else in the country saying, look, we're dog fooding. Civil
#
servants are eating this pension system. So it's also good enough for you. Similarly, I mean,
#
I'm jumping subjects. When you had to build a health system in India, the right place to start
#
is CGHS. Imagine we fix CGHS. We actually make it a world-class, sane, sensible health system and
#
we make it work. It's a significant chunk of people. It is educated, they're sophisticated,
#
and it's a dog fooding. If this health system is good enough for the civil servant, then surely
#
it's good enough for the population. So I feel these are ways in which you think about the reform
#
process. Explain the term dog fooding. Dog fooding is that I'm eating the food that I have made myself
#
it's not dog food. It's not the food that is good enough to be given to my dog. It's
#
food that's good enough for me. It's a phrase. Wonderful. So, you know, before we start talking
#
about India in particular, it seems to me that as you alluded to earlier, that we've evolved
#
differently from the rest of the world in the sense that the whole pensions debate is not about
#
the general population, but about the civil service and that the rest of the world has kind
#
of evolved in different ways. So to get a sense of how this drama can play out, what can you give
#
me about a global perspective on what is a global experience with pensions and what directions has
#
it gone? I think the OECD countries all have population-wide systems of one form or the other.
#
You have some basic pension that the state gives you when you retire. You have some employer-based
#
systems which are also often DB systems. Are they voluntary or mandated? Do employers compete
#
to give good pension schemes? No, I think that in most cases they are sort of mandated by the
#
state and everybody contributes. And on top of it, you may do some voluntary additional contributions
#
for yourself. So in the OECD world, the problem is that when the state is giving money to large
#
parts to the full population really, the fiscal consequences are enormous, much more difficult
#
than what we are facing in India. And that's what that world is grappling with. And there has been
#
tons and tons of reform in many countries. And in some countries like France, they are not even able
#
to increase the retirement age. So there is a wide sort of spectrum of reform systems and pension
#
programs in these parts of the world, and they are driven by demographic change and fiscal
#
consequences of that demographic change. I think in parts of South Asia and countries like India,
#
the problem is different. I think we are animated both by fiscal concerns on the one hand and
#
complete lack of coverage on the other. So you have large parts of this country who have absolutely
#
no access to a pension or no access to a pot of wealth when they retire unless they have built
#
it themselves. So there is no help coming or no institutional structure through which they are
#
incentivized to save. So I think that there are these two forces that are pulling at the pensions
#
question in places like India. So I would say that these are the two extremes really.
#
In the notes that you made for this, you've quoted Robert Palacios as saying all DB systems
#
have failed or will fail. And you give this intriguing example of Japan, where you point
#
out that in 1940, the elderly were 5% and working-age people were 60% ratio of 12 to 1.
#
So 12 working people supporting one old person. In 2020, the elderly were 30%, the working-age
#
people were 60%. So that's two working people supporting each one. And then it doesn't compute
#
if you've designed a pension system for that particular 12 to 1 formulation, it breaks down
#
completely when you reach here. So I'm curious about, can you talk about examples of such
#
breakdowns and how were they tackled by those countries? Because you're dealing with a problem
#
that is far larger than 3%. And also, I can't grog that if 3% in India required 68% of GDP to
#
support them as the projections went, over their entire populations are being supported. But what
#
is the structure of the pension schemes that made them viable when they were viable? And what are
#
the different things that happened politically and economically when they began to break down?
#
Defined benefit systems came up in the rich countries because of that late 19th century,
#
early 20th century impulse of using the 12 is to 1 environment that there are 12 workers and one
#
pensioner. I want to pay the pensioner 50% of the wage. So in a way, I'm loading a half worker cost
#
on 12 people. So each of them is paying 1 by 24 of a tax and I'm transferring it to the 1.
#
These things looked seductive in the 19th century and the early 20th century and they sprang up
#
all over the place. And as longevity changed, these things became a millstone around the neck.
#
These problems have also been extremely destructive in the political system because
#
you can imagine how wrenching it is that older people organize themselves as a lobby to protect
#
the interests of the older people. And the state and the young want to do something differently.
#
So there has been horrible political conflict in these countries where countries have literally
#
been torn apart on these problems. At one extreme is the United States where relatively little has
#
been done. So the United States Social Security and the United States Medicare and Medicaid
#
are deeply bankrupt systems. They are vast implicit debts hanging over the United States
#
government and God knows how and when the United States will get to solving these problems.
#
Is it fair to define it by saying that it's basically paying older people by taking money
#
from unborn people? Every year. So today's young will get money from tomorrow's young and those
#
tomorrow's young are as yet unborn. The numbers in the United States are that Social Security,
#
Medicare and Medicaid add up to something like 300 to 400% of GDP as a whole in their fiscal
#
accounting. So they are in a very bad mess and they've done pretty badly in addressing that.
#
At the other extreme, many countries have done a great job. I saw one very sweet element of a
#
solution in Sweden. In Sweden, they wrote a law. So all the political parties fought and came
#
together around a solution. And the solution was a law. And in that law, they wrote down the
#
principle that the pension system shall always be solvent. We will not let it go bankrupt.
#
What it requires, what it means is that every year you have to keep cutting the benefit.
#
So that number from 50% has to keep going down every year. The mathematical formula
#
for how that number will be cut down is written into the law. So there you have a law which
#
contains a complicated mathematical formula and it's coded into the damn law. So every year the
#
pension goes down. That's their way of keeping it solvent. And interestingly, Sweden seems to adore
#
the old because their most famous pop band was called ABBA.
#
I agree with Ajay and these are called Notional Defined Contribution Systems and they have these
#
complicated ways of arriving at the pension that you will get. And that's based on the
#
average life expectancy of the cohort and the expected interest rate. And so there is a little
#
bit of uncertainty there because you don't know what you will get. But it's clear that
#
what you will get is based on some very transparent factors such as…
#
So it's not guaranteed, meaning there are formulas and it will go down. You are guaranteed that it's
#
going to go down compared to what you see people getting today. So this is one line of attack that
#
you have to renege on those old promises and you have to let go. And I would say to every Indian
#
civil servant that would you buy a United States government bond? Yes, of course, that is guaranteed.
#
There is nothing better than a 30-year United States government bond. 30 years from now,
#
the damn United States government is going to pay you. But do you want to be receiving a pension
#
from an OECD country? You've got to be circumspect. Maybe the government will do it, maybe the
#
government will not do it. And then if there's a pension promise from an Indian government,
#
you are in a much more fragile place as compared to that. How does that famous quote from Keynes
#
go that there's nothing uncertain in life except debt, taxes and US government bonds? Is that how
#
it goes? Something like that and certainly not a US government guaranteed pension. And it seems to
#
me that there's a deep political problem in this as well in these kind of pensions. So describe
#
the political problem to me. The political problem is that once you are old or you're near retirement,
#
now you want that damn promise. And the elderly are often politically influential, they are
#
motivated to join hands and form lobbies. So like in America, there is an AARP, American
#
Association of Retired People, which just endlessly lobbies to extract more resources from society
#
to pay the old. And in some ways, right, if you have been promised something for 40 years of your
#
life, I see why you are fighting for it today. Because you have based your entire life trajectory
#
or your choices on the assumption that this is the money that you are going to get.
#
I mean, at the very unseen level that if you knew the state was going to renege on its pension
#
promises, you could have had more kids. There's a human being who doesn't exist because someone
#
believed a promise. The second line of attack through which this has been addressed all over
#
the world is to build a completely new concept of pension wealth, which is called a defined
#
contribution system. And this actually fits nicely into the two by two by Friedman that you
#
described. In a defined benefit system, we're all playing with funny money, we're playing with
#
government money. The contributions from the people go into tax revenues, and the tax money
#
is used to pay out pensions. So there is this great blending that's going on, and money is
#
fungible. So some people are paying contributions, some people are paying taxes, that money is all
#
pulled together, money is fungible, and some money goes out to pay pensioners. And it has all the bad
#
incentives because you're using other people's money to pay old people. And then it becomes a
#
political compulsion about which political party wants to cultivate the vote bank of the older
#
people, and it goes pretty badly. Defined contribution pensions is the opposite idea.
#
In a defined contribution pension, it is my money sitting in my account is my personal wealth,
#
and not a drop of my money will be used to pay for her pension. So it's an establishment of
#
private property that each person is given institutional arrangements and some kinds of
#
incentives, and even coercion, to put money into that pension account all through life.
#
And it earns returns, and that is key to thinking about this. But it's my money, it's my wealth,
#
it's my personal property. And in a good country, there is no First Amendment of the Constitution
#
that takes away property as a fundamental right. So that property is inviolate, nobody can touch
#
that damn money, it's my money. So I find security and safety in the fact that it's my money, it's
#
my wealth. It's as basic as personal property, that nobody should be able to come to me and snatch
#
my wristwatch like that. Nobody should be able to come to me and touch a paisa out of my money
#
sitting in my pension account. That is security. But how much money you will accumulate, what
#
returns you will earn are unpredictable. And therefore, what flow of annual expenditures
#
you will be able to fund in retirement is not guaranteed. That's a risk you take.
#
So these are the trade-offs. That in a defined benefit pension, it appears you have a guarantee,
#
but the guarantee is actually illusory. In a defined contribution pension,
#
one part is great, particularly in the advanced economies, where property is a fundamental right,
#
where nobody will touch your assets. We can't quite say that in India, but we hope that the
#
people will be mobilized to outrage when somebody tries to touch their property.
#
Then you get a personal pension account, which holds that person's wealth for old age.
#
And we are protected from all the vicissitudes of society. What happens to other people,
#
I don't care. It's me, my money. These are the good things about a defined contribution
#
system. But the downside is you actually can't predict precisely what pension you will get in
#
old age. And like you correctly pointed out with a little bit of outrage that I detected,
#
that isn't there some paternalism in mandating this defined contribution? There's this great
#
quote by David Bowes, where he says, conservatives want to be your daddy, telling you what to do and
#
what not to do. Liberals want to be your mommy, feeding you, tucking you in and wiping your nose.
#
Libertarians want to treat you as an adult. Stop quote. And I had a great episode with David
#
Bowes as well, which I will link from the show notes. But here, therefore, it seems like both
#
being daddy and mommy, that daddy is saying that you have to contribute to your pension
#
and mommy saying your pension will take care of you.
#
So it's a very tough question. And in any case, as Renuka will emphasize, most of India has nothing.
#
They have no formal pension arrangements. So as you know, I am a campaigner around personal finance,
#
and I go around preaching to people that, dude, save more. And, you know, put it away in assets
#
that generate better returns in the long run. But I can see the paternalistic case of forcing Amit
#
to save more. And I feel it's a low amount of damage, because I'm not actually coercing you
#
to take your money away from you. I'm really not distorting many things about your life.
#
It's your money that will sit in your pension account that will earn a good return.
#
And for the rest, when you become old, you use that money as you like.
#
I feel that's a morally justifiable place.
#
I think people have often justified this kind of paternalism, because we don't want to see poverty
#
in old age. And if you end up destitute in old age, then society will be morally obliged to do
#
something for you. And you will end up with cash transfers or some other interventions by the state
#
so that you are not poor and dying on the streets. And to preclude that possibility,
#
because if you don't save, then you're going to come back to me, the state, for help.
#
And therefore, that justifies me pushing you to save some money for your old age.
#
In each country, you've got to ask the question that when the newspaper headlines
#
come along about a former secretary to the government who is now destitute in the slums
#
of Dharavi, how much outrage will be generated? And the more that outrage that will be generated
#
because of choices that person made and random events that happened to that person, the more
#
the outrage that will be generated in that society, the greater is the case for this
#
pension coercion, saying, sorry, all your life, I will coerce you to tuck money away into a defined
#
contribution account so that when you retire, you have a chunk of money of your own money.
#
I'm neither taking money from you nor am I giving money to you, but I am coercing you
#
to make sure that your money is transported into your old age.
#
I want to say a little bit more on the defined contribution system because as we talk a little
#
bit more about DC systems, there are questions around the design of the fund management of these
#
accumulations that become very important. So in a DB system or in a pay G system,
#
there is money coming in and there is money going out.
#
Anuka, what's a pay G system?
#
Pay as you go system. Amit mentioned it right at the start. So there's money coming in and
#
there's money going out. And there isn't much thinking that you have to do about the design
#
of the system. But the minute you start doing defined contribution systems and you are starting
#
to have pension funds and that is your property and nobody can touch it, just the way Ajay described,
#
then who is managing that money? How much is that person charging for managing the money?
#
Is the person running away with the money? All of these questions become very important.
#
And then that's where you get into this whole policy thinking around what the best design of
#
that could be. And for example, some of the countries that moved to this kind of a system
#
were Latin American countries. Chile, for example, had made enormous progress in setting
#
up DC systems, but they made multiple mistakes on these questions of design and the results have
#
not been great. And that gives DC systems a bad name because lots of money is paid in fees,
#
lots of money is lost. And perhaps we can talk about this later, but I just wanted to
#
bring this up that saying that this is your property and then there is a fund
#
is just the start of the problem because that raises multiple problems of its own.
#
Yeah. And quite apart from those downstream problems, I will still register my protest at
#
the coercion and the paternalism involved, but let's not discuss that further. That's a
#
separate subject entirely. I want to talk about the political problem because you pointed out that
#
if you have this news that so-and-so is now living destitute in a slum and there will be outrage and
#
what is the consequence of this outrage? The consequence of this outrage is inevitably
#
political pressure. And it seems to me here to come up against this trade-off, which is
#
ubiquitous in democratic politics, a trade-off between people want to be taxless, but people
#
also want to be given more. They want greater payouts. And this is a tussle. And one way of
#
thinking about this is, you know, that public choice theory term disperse costs and concentrated
#
benefits. So if you take one rupee from every citizen and you give it to one small interest
#
group, they're all making lakhs and crores and costs are dispersed. Citizens don't really feel
#
that 1%. And that's one way it works. But nevertheless, it seems to me that at some point,
#
something's got to give, or is it the case that we get apathetic and we get reconciled to the
#
kind of taxes that we are paying? The peak tax rate under the Indira Gandhi went to 97.5. And
#
taxpayers don't protest enough because they just take it for granted and it's normalized and it
#
creeps up and it's unseen. They don't see what is happening. They imagine we are paying taxes
#
because roads ban rahe hai. But actually, the things that they would approve of being done
#
with their taxes like rule of law and roads are minuscule. You know, there's so much wastage that
#
goes on. But Amit, I think that when you have peak tax rates, you also have peak tax evasion.
#
And so one of the ways in which people deal with this is to have a lot of
#
undeclared income. So it's not as if, you know, there is exit and there is voice, right? There's
#
always two ways of responding to any system. And royalty, which we see more and more of in these times.
#
Or not. But no, no, but my question was different. My question is the political pressures,
#
you know, what are the political pressures in democratic politics where technically I would
#
think that there will always be some kind of fine balance or equilibrium maintained because
#
the taxpayers won't want to get taxed too high and those who are beneficiaries.
#
So rather than keep this abstract, shall we walk through the Indian journey?
#
And at every step of the way, we will see interesting combinations of ideas,
#
interests and institutions shaping outcomes. So I think that's where it will become real
#
rather than speaking about it in a more abstract. Let's do that.
#
In India, from the 50s, we had this thing called the EPFO, the Employee Providence Fund Organization,
#
that was mandatory for private organizations with more than 20 workers. And of course,
#
we had the old British civil service pension. There was a military pension where, as you know,
#
in the Indian military, most people retire at about 35 or 37, but they still get the 50% pension. So
#
it's very attractive to them because they're going to live for a long, long time. And therefore,
#
the NPV of their pension is particularly high. So this was the landscape in the 50s.
#
A big milestone, the first piece of changes to the pension system, I am loath to use the word
#
pension reform, because it's actually a de-reform. Deform came in 1995. There is a global organization
#
called the ILO, the International Labour Organization. They specialize in walking
#
around into helpless developing countries with low understanding of public policy and planting
#
bad ideas in the field of labor economics. So they came into India. This is the government of
#
Narasimha Rao and Manmohan Singh, where frankly, people knew very little about labor economics and
#
pension arrangements and all that. A remarkable new scheme was introduced called EPS, Employee
#
Pension Scheme, which was the first defined benefit scheme for employees of private firms.
#
In the light of all the scary stuff that we've discussed for the last one hour, I think you will
#
be amused to know that this is a scheme that was bankrupt on the day that it was announced.
#
It was just based on wrong calculations. It was based on wrong policy analysis.
#
As you know, I've talked a lot at length about the difficulties of Indian public policy. There
#
was just a lack of knowledge in India at that time. In some ways, you would think that Narasimha Rao
#
and Manmohan Singh and the minister of finance team of the time would have had significant knowledge
#
that they would have been able to withstand the visit of an ILO team, but they weren't.
#
One more bad brick of the Indian pension system came about. The moment these things are done,
#
then it's very hard to undo them. Until today, the EPS is there as a defined benefit thing,
#
paid by the government to every employee of a private firm, now with more than 10 people.
#
These are dangerous things that have been happening. That brings us to the late 90s.
#
In the late 90s, two things were going on. One is that there was a scary acceleration of the
#
annual pension spend. The second is that in an obscure piece of the Indian state called
#
the Ministry of Social Justice and Empowerment. In the Ministry of Social Justice and Empowerment,
#
there were two remarkable people called Anand Bordiya and Ashok Pal Singh and their minister
#
was Menaka Gandhi. They started thinking and worrying about old people in India being destitute.
#
They knew the arithmetic. They figured out the arithmetic that if you just apply
#
the Indian-style population multiplied by some fraction of older people, it's turning into a
#
mess. They were running some subsidy programs, gifting 100 rupees a month or 200 rupees a month
#
to old people, but they knew that spitting in the wind doesn't do anything. They started
#
understanding that there is a big problem brewing and it needs a deeper and more fundamental
#
resolution in terms of the development of pension institutions in India.
#
At the time, Jim Hansen in the World Bank and Sanjay Kathuria in the World Bank were organizing
#
a conference in Goa on the Indian financial system. Anand Bordiya was there in the conference. I was
#
there in that conference. I had worked on pensions in the United States context at the RAND
#
Corporation when I was a PhD student, so I knew a little bit about United States social security
#
and how bankrupt it was and so on. There was almost a chance encounter in the corridor,
#
but little more than that. Shankar Acharya, who was then the chief economic advisor,
#
got Anand Bordiya and me together and he said to Anand Bordiya, you want to build a pension
#
system in India, you need this guy because he understands finance. That's how Anand Bordiya
#
and I started talking. There was a very interesting formal structure that was adopted. There's a
#
person named Gautam Bhardwaj, who at the time was running an organization called Invest India
#
Economic Foundation. The arrangement was that private philanthropy supported Invest India
#
Economic Foundation and Invest India Economic Foundation started doing pensions research
#
for the Ministry of Social Justice. They became a critical meeting point where research papers
#
started being commissioned and meetings started being put together and so on. Then the government
#
set up a committee, which is called the OASIS Committee. OASIS stands for Old Age Social and
#
Income Security. It's just a cute acronym. The OASIS committee was headed by Surendra Dave,
#
who at the time, I think, had just stepped down as chairman of UTI, but he was a PhD economics
#
person who had lived his life in the financial system, so he got finance. The head of the EPFO
#
was a member and I was a member and there were a couple of other members. Project OASIS tried to
#
do first principles thinking on how do we want to think about pension arrangements. Renuka alluded
#
to the frictions and the difficulties of a fund management system. We were lucky that because we
#
were doing this in the late 90s, by that time, we had access to the knowledge and experience
#
of what are called the first generation pension reforms, which are really UK, Latin America,
#
a couple of other countries, where it was basically clear that the frictions, the overheads,
#
and the charges of the fund managers was killing the accumulation. On one hand,
#
putting assets to work through a private fund management system is pretty fantastic because
#
equities earn a good rate of return. If there is a simple mantra for what
#
people should be investing their assets in, it is globally diversified equities. Renuka will talk
#
more about the importance of globally diversified. She has important work on that subject, but
#
equities have that higher rate of return. There are fluctuations. There is risk. That risk never
#
goes away, but on average, equities generate a higher return. There is a power of compounding.
#
When you take a somewhat higher return and you play it out for 20 years, 30 years, 40 years,
#
50 years, it adds up to a lot of money. The opportunity for a defined contribution system
#
is critically linked to equity investment. You want to salt away money every year from age
#
16 or 20 or whatever, whenever a person joins the labor force. You want to earn that
#
multi-decade equity rates of return of that money, but at the same time, you don't want
#
a lot of that money to be burnt up in paying financial firms and there are various frictions
#
along the way. Project Oasis applied its mind to this problem of how to do a better
#
pension system reform that is consistent with Indian style numbers. We used to always do the
#
calculation that in the late 90s, the contribution number we wanted to work with was 10 rupees per
#
day. We wanted to be able to efficiently move 10 rupees per day from an individual. It could be
#
anybody in the economy. We wanted to move 10 rupees per day from that person to efficient,
#
frictionless scale fund managers who would get exposure to equities. This would go on for 20,
#
30, 40, 50 years and generate strong rates of return. There were some really good
#
innovations in that pension system design that we did as Project Oasis in the late 90s. The report
#
was 1999. I'm very pleased to say that actually by world standards, it was one of the first
#
reports that understood many elements of that solution. I was young. I was new to this game.
#
Surendra Dave basically challenged me to think big and bring knowledge of institutional design,
#
of index funds, of computer-based systems to be able to reduce the friction and take away
#
the operational costs of these systems. It was really amazing how he was a much older person,
#
but he knew how to challenge me. He knew how to push me to solve the problems left to myself.
#
I would have been too shy. I would have been timid, but he was able to push me to say,
#
no, that's not acceptable. That's not acceptable. We kept coming up with a better and better design.
#
That was Project Oasis 1999, just a report. This was a report given over to Menaka Gandhi,
#
who was the Minister for Social Justice. Anand Bodhia and Ashok Pal Singh and Menaka Gandhi
#
rapidly understood that this was beyond their pay grade. That small little Ministry of Social
#
Justice could not build pension institutions on the scale of a country because we're dealing with
#
something truly gigantic. What we had designed as Oasis was not just a civil service pension,
#
it was a population scale pension system that would work for everybody. Remember,
#
I said 10 rupees a day of contribution. That was the minimum number. Our worldview in 1999 money
#
was that for the people who can contribute 10 rupees a day, you're running and you can meaningfully
#
build pension assets. We had done nice simulation studies. Susan had written a paper about how
#
equity investment translates to meaningful numbers when you start at 10 rupees per day.
#
Below 10 rupees a day of contribution, we said that's a problem of welfare systems. That there
#
you have to do anti-poverty programs and give them money from the exchequer. That's a zone
#
where pensions cannot help. We cannot solve the problem of poverty. But by the time you get to
#
that minimum number of a contribution rate of 10 rupees a day, 300 rupees a month,
#
then it was proving to be meaningful that we can move this money through a pension system
#
for 20, 30, 40, 50 years and turn it into something material that will make a difference
#
to the old age financial situation of the people. But it's a population scale story,
#
not just a civil servant story, not just an EPFO story. So yeah, we were interested in solving the
#
civil service pension. We were interested in solving the EPFO. But we were most interested
#
in solving the 85% of India that had nothing. And that was a design that was offered, project Oasis.
#
But that report was clearly beyond the implementation capability of the Ministry
#
of Social Justice. So in 2000, Menaka Gandhi went over to meet Yashwant Sinha, who was the
#
finance minister and handed over this report and said that unusual as it is for a government person
#
to not seek or desire turf, I am exiting this problem because it is beyond my pay grade.
#
Only the Ministry of Finance can do it. Here's the report. Now you guys do it and I will support you
#
in cabinet every step of the way. So it was a remarkable act by her that she didn't try to
#
seek the glory and try to grab turf and go back to the cabinet and say, we have done this work
#
and social justice should build this pension system, which would have been very good for
#
the officials and the career of the people in the Ministry of Social Justice and of Menaka Gandhi.
#
She did a very selfless thing. She went to Yashwant Sinha. She said, only the Ministry of Finance
#
can do this. And so here, I'm giving you this report. I'm giving you my good wishes. I'm giving
#
you my blessings. And whenever there is a battle, count on me and I will appear in the cabinet and
#
I will support you to the hilt. But for that, you guys have to do this. So that's how it moved to
#
the Ministry of Finance. And it just so happened that there are accidents in all these things.
#
And in 2001, I was hired into the Ministry of Finance. So it was an accident that this
#
report was being processed in the Ministry of Finance. And even though I had no idea that
#
these things would come together in 2001, I ended up joining the Ministry of Finance.
#
So you're the co-author of the report, who is now one of the people who is going to decide what to
#
do with this report? Well, being a bit player in the implementation team. So nothing much happened
#
for a while. And then the turning point of this work was when S. Narayan became the finance
#
secretary in the DEA. When S. Narayan became the finance secretary, he sat me down and he said,
#
I'm trying to remember the exact number. He said something like, I have 253 days on this job. So
#
what are the battles that are worth picking? So on his first day, he sat me down and he said,
#
I have 253 days in this job. So let's think about what are the priorities. And I spent several days
#
with him talking through many fields. And he had to pick and choose a few things. And remarkably
#
enough, he chose pensions as one thing. He said, look, this is very big. It's very difficult,
#
but let me knock on doors. Let me try. Okay. So step one, he went to the finance minister,
#
Jaswant Singh. I was not in the room, but I've heard stories from S. Narayan about what happened
#
in that room. And what happened was absolutely remarkable. Jaswant Singh was one of those great
#
ministers of this country. He always thought about things on a strategic scale. He always
#
thought for 25 years. He always thought for 50 years. He understood this in a flash, that
#
the old pension arrangement is strangling the Indian state. The projections of those
#
high growth rates of pension payments was going to create a fiscal disaster for the Indian state.
#
And you needed a long-term solution, which would work not just for civil servants,
#
but it would work for the entire economy. And he said, this is first order. This is fundamental.
#
If we don't fix this, we're going to destroy the entire public finance of India. We're setting
#
ourselves for a horrendous political conflict because one by one, we'll start reneging on these
#
promises. And so this is a big one. We're going to fight it, even though it's going to be very
#
unpopular with those 3% or with the EPFO, that we're going to fight this. Jaswant Singh and S
#
Narayan took this to the other big two of that NDA cabinet, Advani and Vajpayee. Once again,
#
I was not in the room, but I heard stories from them that by and large, they all coalesced
#
around this philosophy that this is going to be unpleasant. We're only going to suffer some
#
political pain for doing this, but it is so big, it is so important that we can't leave this aside.
#
And they saw the graphs, they saw the explosive growth of pension payments in that period and
#
things that can't go on won't. And so the big three of the cabinet came together and decided
#
that this is a reform that we're going to do. At the time, UK Sinha was the joint secretary
#
in the DEA handling this subject. Technically, he was joint secretary of capital markets,
#
which is a bit of a misnomer. Traditionally, the JS capital markets has run a lot of the more
#
intellectual work happening in the DEA. So somehow this landed up as UK Sinha's work.
#
And so UK Sinha and I had this amazing opportunity of being the support crew around these meetings
#
taking place between the big three of the cabinet. And they increasingly came to the decision
#
that we're going to do this. So what was the idea of the reform? The idea of the reform was
#
that we will not renege on promises made to the people who are workers as of today.
#
So you're standing in 2003 and there are people who have been recruited in 2002.
#
At the point of recruitment, a civil servant signs a contract. In that contract,
#
there is a list of terms and conditions and promises. And they said, we will not renege
#
on those. What we will do is we will change the terms and conditions of the future recruits.
#
So the pension reform will be phased in from the future. So that's much easier that you're
#
not getting into a great war with the present workers or the present pensioners saying that
#
we'd like to give you less pension as compared with what we had originally promised you.
#
But we're talking to new recruits and the new recruits get the choice clearly. Do you want
#
to become a civil servant or not? If you don't like the pension promise, don't become a civil
#
servant. But once you sign the contract, you've signed a new contract and it's a consenting
#
adult who signed the contract. So the plan became that we will phase in a new pension system from
#
the 1st of Jan 2004, that every new recruit from 1st of Jan 2004 onwards will be put into
#
the new pension system, which was designed by Project Oasis. And again, I was not in the room,
#
but there were many discussions between Vajpayee and the other cabinet members and UK SINA around
#
calculations. So it coalesced around the following numbers. So imagine that there's a civil servant
#
getting a wage of 100. Then imagine that we knock out 10 rupees, we take out 10 rupees from that
#
100 and that goes as a contribution into the pension account. And we give that person a 10
#
rupee raise and that new 10 rupees also goes into the pension account. So we're taking away the old
#
pension system. We're giving a 10% raise, the wage goes from 100 to 110, but we're taking 20 rupees
#
of the 110 and forcibly putting it as a personal wealth of the individual inside that person's
#
pension account. And it's fascinating that Mr. Vajpayee asked for many, many calculations of
#
alternative ways to reject these numbers. And I did all those calculations of doing simulations
#
into the future, understanding what equities will do, equity investment, compounding with
#
alternative numerical values. And finally, 10 and 10 came to the simulations and projections where
#
the political genius of Atal Bihari Vajpayee felt comfortable that I think this is a good deal,
#
that we're taking away the old pension, but it's a 10% raise and we're taking away 20.
#
We're putting it into a pension account and that 20 grows so well with compounding that all in all
#
you're square, that this is going well, it's a good deal and everybody should be happy.
#
So this was the story of the pension system. So I think on the 12th of December 2002,
#
Vajpayee signed the file and the decision was taken that there will be this new design of the
#
new pension system, which is basically the design of the committee of the project Oasis.
#
This will be implemented and that entire architecture of fund managers and mechanisms
#
of moving money, of creating individual accounts, Renuka emphasized, how do I make sure that the
#
money doesn't vanish? How do I ensure that the fees and expenses of all the financial players
#
does not suck away the accumulation? All these things had been thought about and designed.
#
And from 1-1-2004, all new recruits of the Indian state would be put into this new pension system.
#
Now, I want to tell some little stories. So first was state governments. This was put on
#
offer to the state governments because the union government has no right to force anybody when it
#
comes to the state government. Each state government is its own decision-making unit,
#
but state governments were very receptive. They also knew, they also got this cold that
#
this stuff is unaffordable. Exactly as the union government was understanding that there is a
#
pension crisis, state governments also fully understood that there is a pension crisis. So
#
UK Sinha and then KP Krishnan, who were the Joint Secretary of Capital Markets,
#
they engaged with all the state governments, ran many meetings. And I think apart from West Bengal,
#
and Kerala. I don't remember whether Kerala came in later, but West Bengal probably didn't come in.
#
All the states agreed that this is a good idea and we are also moving.
#
There was quite a battle and a complicated problem of understanding every single organization of the
#
union government that has employees who are entitled to the old pension system. This is
#
a Herculean battle. It's very difficult to get that list. Government of India is a shambolic mess.
#
Nobody knows what organizations are where, what is the list of people who are workers,
#
what is the list of people who are pensioners. You'll be astonished at the bad state of data,
#
but all this hard work started happening of assembling the list of all organizations
#
where there is an employee who is entitled to the old pension system. For example, consider Bombay
#
Port Trust. Is Bombay Port Trust a government organization? Does Bombay Port Trust have
#
employees who are entitled to the old pension system? And if they are, then yes, they are covered
#
by the December 12, 2002 cabinet resolution. This is the kind of large scale complex work that began
#
in laying the groundwork for the implementation. Now, all this landed into a new set of questions
#
when the UPA won power in 2004. So, on one hand, this decision was taken on December 12, 2002.
#
On the other hand, the NDA lost power and there was a new government in 2004. And all these
#
questions were reopened as they should. That new government was going to apply its mind
#
to these questions. There were two kinds of challenges. One kind of challenge was that
#
should there be an NPS at all? Should we just stick with the OPS? And the second was that do
#
we really want to go build this new NPS architecture or should we just give it to IRDA and the existing
#
insurance companies? And the insurance companies vigorously lobbied for this. They really wanted
#
it and they put significant effort into that lobbying. The strategic idea that I feel we
#
should be very careful about is that this defined contribution system is a fund management play.
#
Once it becomes an insurance thing, it is too tempting for insurance companies to propose a
#
defined benefit product because that's an actuarial thing. It comes naturally to the way an insurance
#
company thinks. So, it is better to keep these two things separate because you run the risk
#
of some DB creeping back as long as there are insurance companies in it.
#
Just to clarify, in every defined contribution system, through the working life, a person is
#
accumulating pension wealth. Then at the end of that, it should be the choice of that person
#
about whether to buy an annuity. An annuity is a product where you put down a hundred rupees
#
and then you get some monthly pension until you die. That is produced by an insurance company.
#
But the rest of it is a fund management story. So, we wanted to protect that intellectual
#
clarity. So, we felt it's better to separate this out of insurance companies and IRDA. So,
#
there was quite a lobbying push by the insurance companies at the time. So, these were the two
#
questions that were evaluated by P. Chidambaram, by Rahul Gandhi, by the UPA cabinet. The decisions
#
were taken that we fully agree and endorse the NPS design and we will go through with the NPS.
#
So, that was a less polarized age. So, the fact that these decisions had been made
#
by a BJP government did not interfere and the story was to go on. These were the political
#
decisions of the new UPA government. Ajay, but while they did not roll back the NPS
#
for a long time, they did not move ahead with the design of the NPS as was envisaged either.
#
For example, the PFRDA Act was not passed for a long time. For a long time, the money was not
#
given to pension fund managers because they were not licensed and it stayed in the old sort of
#
Sarkari fund management system where they just got this 8% return or around 8% because EPFO was
#
giving the same. So, I think that it was not a smooth transition.
#
So, let me describe that mess. At the level of P. Chidambaram, Minister of Finance and
#
the cabinet, there was a decision that we are doing this. The UPA one ran into trouble because
#
the CPIM was a critical partner to the coalition and the CPIM was opposed to the new pension system.
#
So, there was quite a standoff. The UPA was not keen to turn this into a make or break fight.
#
So, there was an interesting halfway strategy that was developed through which you can make
#
progress. So, let me describe the subtleties of those steps because actually they give great
#
insight into how to do public policy and also the precise details of what a pension system
#
contributes. So, one of India's great constitutional lawyers, Mr. Chidambaram,
#
figured out the whole legal strategy as follows. Step one, you are a new employee. There are terms
#
and conditions of your employment. It is the full power of the union government to amend those terms
#
and conditions as applicable for a new employee. You do not need to go back to the parliament to
#
do that and they went ahead and they did that. So, that is part one, that the promise of a DB
#
pension was removed for all employees after 1-1-2004 as was planned. That is piece one.
#
That is done. Now, you come to the problem of the record-keeping agency and the fund manager
#
and a variety of other service providers that are required in the NPS. Instead of thinking
#
there will be a regulator who will demand certain behavior and performance out of those persons,
#
the strategy taken at the Ministry of Finance was that for each of these persons, a legal contract
#
was written and in the contract, the burden of regulatory requirements was placed upon those
#
persons. So, you wrote a contract with the fund manager. In a way, the fund manager was then
#
not a regulated person, there was no regulator, but certain burdens were placed upon that fund
#
manager through contract. So, there was a contract with the fund manager, there was a contract with
#
the record-keeping agency, and that is how the pieces of the NPS architecture started coming
#
about. As Renuka correctly says, it was a bit in limbo. It was limping along, it was not perfect,
#
but it did happen and it did get going. And anyway, many years were wasted on that
#
Herculean journey of finding everybody who was recruited after 1-1-2004 and giving them account
#
numbers, doing the account opening, and wiring the piping of their monthly pension flows. So,
#
this was the early journey of the NPS. These things were solved late in UPA 2, where the CPIM was not
#
essential to the government. So, they went ahead and they enacted the PFRDA Act. The PFRDA stands
#
for the Pension Fund Regulatory and Development Authority. So, that was created by law and that
#
law created the regulatory structures for the pieces of the new pension system. But the NPS
#
was up and running for all new recruits after 1-1-2004. So, this is the story of the NPS,
#
starting from Anand Burdiya and Menaka Gandhi, all the way to the creation of the PFRDA through
#
a parliamentary law in 2012. A couple of things I have to say. One is, from what I can make out,
#
I love the fact that the design of this is based so much on voluntary action in terms of,
#
there is no coercion. You know, you keep your promises to old recruits, new recruits are told,
#
here's the contract, you want to sign it, sign it, don't sign it, don't sign it. Obviously,
#
everyone signs it. And again, fund managers and all that, it's not regulation, it's contracts.
#
I sort of love that aspect of it. And the other part of it, which makes me actually a little
#
emotional, is that you have all these people from different parties, you know, right from Menaka
#
Gandhi to, you know, people like Jaswant Singh, Vajpayee, Advani and later on, you know, Chidambaram
#
and Mohan and so on, who are talking to each other and acting in the public interest and who
#
are taking the long view. And it's so beautiful and we just, it's so missing today. You know,
#
it's really sad. And also at the staff level, there were no purges. So, there was complete
#
intellectual and bureaucratic continuity. All the people who had worked on the NPS
#
in the NDA-1 were the people who continued to be working on the NPS in the UPA-1. So,
#
there was continuity and the institutional memory was not lost, the intellectual capital was not
#
lost. You worked with NDA-1, you worked with UPA-1, fascinating. So, let's take a quick
#
commercial break and at the other end of the break, we shall go deeper into what happened 2004
#
onwards. Have you always wanted to be a writer but never quite gotten down to it? Well, I'd love to
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just a willingness to work hard and a clear idea of what you need to do to refine your skills.
#
I can help you. Welcome back to The Scene and the Unseen. I'm chatting with Ajay Shah and Renuka
#
Sane and we're talking about pensions and at the break Ajay said, the happy part is over,
#
now it's all downhill from here. It gets sad and despondent and the wailing of the dispossessed
#
or the mewing of a kitten will sort of attend the rest of our conversation. However,
#
before we get there, you have a story for us, Ajay, which actually belongs to the earlier,
#
happier half, but let's begin this half with it. When the UPA1 government came to power,
#
they were puzzling over these questions. Of course, there were lefty people attacking the
#
new pension system saying that the promise of pensions is being taken away and it's being
#
replaced by a defined contribution system. So, I remember one little episode. Vivek Debrau was at
#
the Rajiv Gandhi Institute for Contemporary Studies and he pulled together a group of
#
younger Congress MPs led by Rahul Gandhi and I spent a few hours with them doing something
#
like this. From scratch, the first principles reasoning about where we are and what are the
#
problems of the old pension system and how the new pension system is the right answer
#
to these problems. I hope that was part of their thought process and the decision in the Congress
#
to go through with the NPS reform. Similarly, there was a very interesting moment
#
around the insurance companies. I had emphasized that the insurance companies and IRDA were very
#
keen to take this under their fold because it gives them more business and as I said,
#
there is a very special temptation for an insurance company to push DB because insurance companies
#
have the unique ability to do DB. Whereas, fund management is a more commoditized industry and
#
insurance companies have no special value add in doing fund management. In fact,
#
there are other organizations in the country that do well at fund management.
#
So, I remember there was a meeting organized by P. Chidambaram where he invited Surendra Dawe
#
and the CEOs of all the insurance companies. At the time, there were some 12 or 13 insurance
#
companies and I was just a spectator but these are amazing stories about how these debates
#
took place in that period. Mr. Chidambaram asked each of the insurance company CEOs
#
to speak for 10 minutes. So, I seem to remember there were 13 persons. So, for 130 minutes,
#
they all made interesting points about why the NPS should just be done by the existing
#
insurance companies and IRDA and there was no need to build any separate machinery.
#
And at the end of that, he asked Surendra Dawe that how would you respond to this?
#
And Surendra Dawe did a brilliant short 15-minute response explaining why it made sense
#
to have NPS as standing distinct from the insurance companies. The meeting ended.
#
We all went home and the next day I heard that Chidambaram made up his mind that it was going
#
to be separate. So, these were the little milestones and very high drama for me in those days.
#
But these were the milestones about how these things got done.
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Marvelous. Let's go to the sad part of the story now. What is the sad part? Why is it sad?
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Where do we begin? We could just begin from 2004 itself or from when you have this new government
#
coming in. There is a delay in the sort of full-scale implementation of the NPS because
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for a long time there is no PFRDA Act and there are fund managers but there are multiple rules
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or the way the system functioned right from the outset deviated from the principles that
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Project Oasis had laid out. What is the PFRDA Act?
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It's the pension fund regulator that regulates the various services.
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To make this happen, you needed to bring the regulator into being with an Act.
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Exactly. But even before that, there was a certain vision of the Project Oasis report
#
which had various elements of the pension system. They had fund managers and then there was a
#
record-keeping agency and there was supposed to be annuity service providers. There was a vision
#
around all citizens of the country being able to access the NPS. I didn't say too much about that
#
but I thought that that was a beautiful feature of the design that not only civil servants but
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anybody in the country could open a pension account in the NPS and then once you were in,
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the choice of the fund managers was the same. So whether you worked in government or you worked
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outside of government, you could choose the same fund managers and that brings government employees
#
and non-government employees on a similar footing accessing the same systems in a way that has not
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happened before in the country. It also brings economies of scale for the fund managers but
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unfortunately this did not happen. So the government employees were always kept separate.
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The rules around how they access the NPS, the funds that they could invest in were always kept
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separate from this NPS citizen model so to speak and every year you had these sort of new, this is
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a corporate model and then this is an NPS citizen model and then this is an NPS government model
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and so we kept bringing in wedges into the way that the NPS was supposed to work. Similarly,
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for a long time government employees were not allowed to invest their money in private fund
#
managers. So earlier it was, the idea was that fund managers would come in, there would be an
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auction based system so that fund managers would get a license to manage the money and then it was
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your choice which fund manager you wanted to direct your contributions to and for government
#
employees they would come from the government system. You would indicate that I like fund manager
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A versus fund manager B. How many were there? There were supposed to be six in the beginning
#
and then there were three public sector fund managers like LIC, SPI and UTI and there were
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three others that were private but government employees were not allowed to put money into the
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private ones. They were only putting money in the public ones. There were rules around
#
investment choice so one of the features or the vision of the NPS was that you could choose the
#
fund that you wanted to invest in. That did not happen for government employees for a long time
#
because your money was divided equally into the three funds or sometimes the lowest cost fund got
#
bulk of the money and things like that. So right from the outset there was a vision of the NPS of
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being this seamless system where anybody could go in, anybody could choose the fund manager,
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anybody could invest and government and non-government would be part of this
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but that never came to be. So I think that was one design. So you just never took off the way
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was meant to take off. The other part of the system that we alluded to was the fact that
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we would not have high fees or we would have index funds so that the fees of the fund managers are
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kept lower but I think that increasingly there has been pressure that you change these fundamental
#
elements of the NPS. So now you do a little bit of active management which increases the fees
#
and things like that. So that has also diluted the way the NPS was supposed to have been
#
functioning and that's a little bit of a mess in my opinion. I think the third thing that happened
#
was this emphasis on informal sector pensions and I think again we spoke about how one of the
#
motivations for the NPS was that a large part of the Indian workforce did not have access to any
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formal mechanism and NPS was supposed to be that mechanism whereby at least those who could save
#
let's say 10 rupees a day could access the same channels and put their money in but of course
#
you can't access a bank because the transactions cost of moving money from a bank to the fund
#
manager would be much higher and there would be different models or different aggregators or
#
different agents who could go and collect that money and then put that money into the NPS and so
#
on and so forth. But there again I think that it never really caught on. We started with the NPS
#
Swavalamban scheme which was a co-contribution scheme where for every 100 rupees that an informal
#
sector worker put in as an incentive the government would put in another 100 and for three years you
#
would get this co-contribution and this money would grow. But in a span of three years in 2015
#
they shut down the NPS Swavalamban scheme and started a new scheme called the Atal Pension
#
Yojana which is like a mixture of a defined contribution and defined benefit scheme wherein
#
you put in some money today and we guarantee that you will get this pension in 20 years time,
#
30 years time or whatever it is and there is a whole schedule of contribution and payment.
#
I think that brings uncertainty to the system because you've started on one thing and abruptly
#
you have now gone into something else. So I think and because of that there has been a lot of emphasis
#
on increasing coverage. I think that that emphasis is a little misplaced because until you get the
#
fundamental features of the system right it doesn't make sense to keep harping on expanding
#
coverage and there were many of these things in the NPS that were broken like I said you know fund
#
management and we didn't solve for them. Then similarly there were issues around how
#
money from government was not reaching the CRA, the Central Record Keeping Agency,
#
and then the pension fund managers on time. Now that's a huge problem. So you have this
#
constituency of government employees who are now part of this system and what they are finding is
#
that their money is not reaching on time and there are some CAG reports that allude that show that
#
this is not happening. I think that this is a fundamental problem and should have woken up the
#
PFRDA to say look this is the most important thing that we have to focus on that we have to
#
get this system right for the big chunk of contributors that are there to this system.
#
My sense is that it was not taken as seriously as it should and of course
#
that brings in discontent for the government employees. I think the other big problem that
#
happened was that this was such a big shift from an old world where you got a 50 percent
#
pension of your last wage to a system where you know there are these fund managers, there is no
#
guarantee on the pension, who knows what they are going to invest in and you know as a government
#
employee who has not been adequately informed about what the hell is going on I think it makes
#
people very nervous about what they have been put into and again when the NPS was designed and
#
at the outset I think that there was consensus that we will do a lot of work on education and
#
just information dissemination so that employees know what they are getting into and what they
#
might be getting out of. So every year you should get some balance statement, every year you could
#
get some simulations around what the trajectory of your accumulations would be like and I think
#
that again there was a little bit of a failure where this kind of dissemination never really
#
happened. And you know you mentioned that like one of the fundamental points that you disagreed
#
with is that there isn't a common pool of fund managers everybody can choose from that if you're
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a government servant you've just got three and I think LIC was one of them and the other two were
#
also government. Yes they were PSUs. They were PSUs in which case the incentives to the PSUs would
#
have been absolutely horrible I'd expect the performance to be worse than the private guys
#
and like was that the case is that you know because then I can as a government employee
#
I can totally imagine distrusting that I would say I'd rather put my money in an index fund
#
because I know that will grow. Now I think that it wasn't so bad because the investment
#
guidelines of the PFRDA were such that you couldn't really do too much creative fund management
#
and again because it was an auction based system which had decided that this would be the fee that
#
you could charge in some ways that there wasn't much of a performance differential between the
#
fund managers. But at the same time what is the incentive for the fund manager if you know for
#
the first many years only the PSU funds are going to get the government money because really the bulk
#
of the accumulations or the contributions would come from those that are part of the mandatory
#
system. Another important feature of the NPS was that fund management was separated from
#
collections. So very often when you invest in something the people who are taking the money
#
from you and paying the transactions cost of taking the money from you are also the people
#
investing the money and then charging you an asset management fee for investing the money.
#
What NPS did was it separated these two. It said that there is a whole host of organizations that
#
are called points of presence and they will go and collect your money and they will charge you
#
some sort of a transaction fee and then there are these fund managers who are going to invest the
#
money and get an asset management fee for the same. Again there was a lot of pressure so that
#
fund managers could also do sales and marketing because a bulk of the cost of fund management
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or where contributions get eaten up is really sales and marketing and to a large extent
#
I think NPS has done well on that where you know it's still not full-fledged sales and marketing
#
the way that you see in the insurance and the mutual fund sectors but on the flip side fund
#
managers would argue that this is what stops them from selling the NPS to a wider pool of people.
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And I thought it's so ironic to call you know the new scheme in 2014 the Atal Pension Yojana
#
because I imagined from the story that Ajay told that Atal himself would have disapproved of
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something like this given the thought that he had himself given to it
#
you know under the guidance of his teammates. So you've spoken about how there was sort of
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an optimal design that you guys had come up with and then it becomes something else
#
and part of an optimal design of a policy not actually being implemented is a messy act of
#
compromise where you're dealing with different stakeholders and interest groups and whatever
#
and you're coming up with something and you don't want the perfect to be the enemy of the good so
#
what is there is still worthwhile but do I get a sort of a sense here that it wasn't just that
#
it wasn't just that that you know in certain fundamental ways like the fact that you can't
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choose your fund manager as a government servant seems like a really fundamental flaw to me because
#
I'd want the maximum choice so is it then the case that you know that there were compromises
#
that weren't necessary if so why did they happen and you know what were the big flaws in the way
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this was going forward? My sense is that the appointments to the PFRDA and the folks making
#
the decisions were not entirely invested in the idea of the NPS itself and that's my speculation
#
that you appointed people from the old world who came from a pre-NPS world and perhaps did
#
not buy into the philosophy of the NPS itself. I think that was part of the problem and that
#
less attention was paid to these questions that were bubbling up and figuring out how to solve
#
them. I feel that much more attention got diverted to the question of coverage to improving coverage
#
and getting the informal sector into the pension's fold and less attention was paid to these
#
you know mandatory folks who are already in the system potentially disgruntled because you know
#
they don't understand the system their money is not reaching the system and dealing with those
#
problems. Another thing that happened was I think there was hasty implementation by the state
#
government so to give you an example NPS will give you a reasonable benefit if you stay in the system
#
for let's say 30-40 years of your working life that's where the power of compounding works
#
and that's where you will accumulate a reasonable corpus that you can annuitize and get some pension.
#
Now if you are already 40 years old or 45 years old and then you get thrown into the NPS because
#
you are you know you were earlier a contractual employee and then you got made permanent and
#
therefore now you are part of the NPS then you don't have that much time actually to accumulate
#
that money and therefore at the time of retirement your accumulation is not going
#
to buy you a big annuity and of course you're going to be very unhappy because all your peers
#
who are part of the OPS because when they were 25 it was the OPS you ended up joining government
#
when it was you know you were 40 or 45 and you've not had the time to reap the benefits
#
of the NPS. I think that these decisions could or these should have been recognized
#
and there are easy fixes to some of these problems but they were not done
#
and I wonder I think that's sort of myopic thinking on the part of people who are making
#
these decisions at the time. I want to add two things to this it sounds like arcane bureaucratic
#
detail but there was one very important milestone the subject of pensions moved out
#
from the department of economic affairs to the department of financial services
#
DFS within the ministry of finance I think in 2007 or 2008 and that was actually quite a rupture
#
because the institutional memory was all in DEA and in external research organizations that
#
were well integrated with DEA at the point that it moved to DFS there was a loss of momentum there
#
was a loss of institutional memory. Carrying forward where Renuka was right now I remember once
#
I was invited by the government of Karnataka to spend a day with trade union leaders in Karnataka
#
it's a while ago to discuss their criticism and complaints about the NPS and I was a private
#
citizen but I did this and actually a lot of their practical anecdotes and complaints were
#
solvable meaning either they were just factually wrong or as Renuka described there were corner
#
cases which were really not economically material but there were individuals stuck in those special
#
situations and that needed solutions so there was a need of responses of addressing those corners and
#
it required that combination of understanding the principles and the foundations of the NPS
#
and being responsive and facing unhappy users and diagnosing sometimes that it's just
#
that there is an ideological divide you want to dump costs on the people
#
sorry there is no deal there sometimes you're factually wrong or you're conceptually wrong and
#
there is room for facts and evidence and arguments and sometimes that there is a genuine
#
case where the NPS as designed is doing a bad job and is being unfair to a person and that needs to
#
be addressed but that kind of care in diagnosing these bug reports and addressing them somehow
#
there was a loss of momentum in doing that. So I think of you know in the entire narrative
#
especially your narrative before the break Ajay I see this tremendous creative energy from this
#
bunch of people who in a purposive way they're doing something whether it is you know the
#
specialists within the ministry who are working on project oasis and whatever or whether it is
#
the politicians who get the big picture like you said Jaswant Singh being extraordinary and that
#
he's taking a strategic view a 20-25 years view and seems to me that that momentum is affected
#
by two things and the first is the shift from the DEA to the other department within that and they
#
institutional memory being lost so whereas for someone like you it would have been a labor of
#
love for someone else who is taking over it's a job to be done well perhaps but not quite a labor
#
of love but the other shift is of political time horizons like a politician's time horizon is
#
always till the next election whether it's five years or whether it's even much sooner because of
#
the next local election or whatever and therefore there is the curse of short-termism which is a
#
danger that is looming and it seems to me to be a really happy accident that there are politicians
#
who can take the longer view but the typical politician will take the shorter view especially
#
if that task of getting to the top has been a long hard slog that has lasted decades and what I see
#
since 2014 my persistent complaint is that a lot that short-termism is more and more reflected
#
whereas there is a sense that governance doesn't matter as much as narratives narratives matter
#
and Renuka what he was saying about coverage the focus on expanding coverage rather than
#
fixing how the system works is exactly what I would expect from a short-termism that privileges
#
narrative over actual governance or how it actually works so you know would that be an
#
accurate assessment yeah maybe also there is a lot of pressure from you know how India looks in
#
various international comparisons on the question of coverage and I feel that that
#
animates a lot of discussions and I again I kind of feel that that is the wrong metric to focus on
#
you know for example as I had said earlier the question of pensions really is a question of how
#
much accumulation you will have at the time you retire and then what are the products that you
#
will use to draw down that wealth because you don't know how long you are going to live
#
and in some ways at the stage that we are in it makes me question now whether that accumulation
#
of wealth should be focused only on a product called a pension because really what you want
#
is accumulation of wealth what you want is people to save and get to a point where they can buy a
#
drawdown product and somewhere in this this desire to look good in reports that show that we have
#
very poor coverage this was lost I think that's a big part of the problem you know a digressive
#
question I'll again slip back to something larger and then I'll come get down in the weeds again
#
with you is that it seems to me that if you want to have savings or if you want to have some kind of
#
security when you're retired and when you're old there are different instruments for doing that
#
one instrument could be whatever the pension scheme is another instrument could be children
#
you know another instrument could be just saving much more from your private income
#
and in some of them I think it would be wrong for the state to adopt coercive measures or to direct
#
from the top down what you should do like how many kids should you have for example you know
#
to dictate to poor people know you must have minimum four kids you'll be safe after your
#
retirement it would be absurd and dystopian but at the same time we look at another instrument and
#
we say okay we'll you know we'll pretend from the top down that we know how to do this and etc etc
#
and and I understand that a lot of the design of what you've spoken about is all voluntary
#
people are taking voluntary actions they can choose a fund manager they can choose whether
#
to invest or not and that's fantastic but in general at a higher principle is that something
#
that you know becomes a factor in this whereas there is a danger that policy people in the weeds
#
may just be thinking about how can we make this work optimally rather than these sort of bigger
#
moral questions yeah I think so I think when you are a policy monk and you are thinking and your
#
job is to think about pensions you're only going to think about how to make that particular pension
#
system work but the fact is that people are doing multiple things and like you said and you know
#
again there is some research that shows that given where India is it may actually the returns to
#
educating your children might actually be higher than returns from investing in pension funds
#
that's a distinct possibility and that is something that you should consider
#
that's a higher level question therefore there's one more dimension in which with the benefit of
#
hindsight I feel we went wrong right from the design of the intervention which took place in
#
2002 there was always this clarity that every existing worker and pensioner as of 2003
#
is fully protected will get their DB pension okay so that's a tax
#
upon the government that's a challenge upon the government to pay pensions to all existing
#
pensioners and workers on top of that there was the 10 wage hike to all the workers which was
#
done when the NPS was introduced so the government was spending more to start building up the corpus
#
the personal wealth of all the new employees from 1104 onwards now I feel that we needed to
#
say more and say clearly to all concerned and to all policymakers that this is a very noble thing
#
to do but for one generation you're actually paying double you're paying both you're paying
#
that 10 wage hike to all the workers to using which we are pre-funding their future pension
#
costs into the DC account and we are paying all the old people it's going to be expensive
#
and the real gains are only going to come when the 20 year old of 2004 becomes 60 that is 40
#
years from now 2047 on that day that person retires goes off into the sunset with the NPS corpus
#
and the government has to pay nothing by way of defined benefit pensions that's the kind of
#
time scale on which the Indian state benefits we needed to hang in there for those long time
#
horizons it's actually a bit better than that because there are pensioners and workers who
#
are dying along the way but there's a long period in which there is no ready fiscal gains that are
#
obtained in the long run the problem is solved I feel we didn't talk enough about this and we
#
didn't evangelize or you know that just the pensions community did not stay together so
#
pensions work moved from da to dfs the researchers all packed up their bags and left and the field
#
of pension reforms basically emptied out and you know one more thing that happened was as I was
#
saying that government employees were not told or given enough information about what this new system
#
is and therefore there was a lot of concern about how much money they are going to get
#
at the end of their working life now one of the response of the response of the government was
#
that okay fine we will just increase the contribution rate from 10 percent our
#
contribution rate from 10 percent to 14 percent so earlier it was 10 plus 10 now it is 14 plus 10
#
so the employee continues to contribute 10 percent but the government as employer now puts in 14
#
percent what this has done is that it has increased the burden on the government because
#
it's putting in an additional four percent and the old and ops payouts continue anyway and now
#
you've also increased the burden of the nps and not sure how happy that has made the people that
#
were disgruntled because the root cause of the problem was the fact that they did not know
#
what exactly this system is they did not know what pension that what is the accumulation that
#
they are likely to get and i'm not sure that that problem has been solved all you've said is now
#
we'll give you 14 percent but that still leaves me with a lot of uncertainty around what i am going
#
to get and you still have those earlier pension schemes going you still have the ops eps you
#
have the problem of orop coming up for example which became such a political hot potato
#
so take me a bit through all of those because you know the i think what happens when institutional
#
memory changes is that every new person who tackles a problem whether it is a wonk or a
#
bureaucrat or a politician has to then take in this entire landscape from scratch and there
#
may not be you know a surendra davai or a najay shah to kind of help you in the sort of primer
#
that you've given me just now so what what is that landscape looking like what is the discourse
#
around pensions looking like i think the big event that happened was in 2014 where they actually
#
announced one rank one pension so as far as i know that earlier the armed forces were supposed
#
to be a part of the nps but because they retired earlier their contribution rate could not just be
#
10 plus 10 right something else had to be done and that was not worked out in 2002 but the idea was
#
that we will work it out over time however i was part of that so i did conversations with army navy
#
and the air force in each case i spoke with groups of the leadership and i explained this
#
entire reform and there was this rough plan that the civil people in the armed forces would go
#
into nps right away the armed forces new work would be done to figure out the neutral transition
#
because the person at a young age is transiting into a 50 pension so they would need to be given
#
a different arrangement rather than the 10 plus 10 and the idea was we'll get the nps up and running
#
we'll come back to you and we'll do that negotiation somewhere and this was in the nda1 period
#
somewhere in the transition to upa in all that uncertainty around the cpim blocking the reform
#
these arrangements and agreements somewhere they got lost and the institutional memory was
#
not carried forward and it never got done so then that was left as a difficult problem of
#
what is to be done on the military pension and then in 2014 we went ahead and announced the
#
one rank one pension which you know as ajay was talking about earlier there is inflation indexation
#
and then there is wage indexation and orop was really wage indexation and it increased the
#
pension burden by huge amounts i think again you know we were discussing how government employees
#
see the the fiscal burden and the the impact that it may have on the pensions that they
#
actually get 30 years down the line when it is time for them to get the pension
#
another way this affects the landscape is that you may not get pay hikes that if you are if the
#
government is fiscally constrained then you may see changes in the way the pay commission works
#
you may see changes in the way that pay hikes happen and for example in the case of defense
#
pensions the agnivir scheme may be a result of the the increasing pensions burden because
#
of the orop basically your current army would suffer because you can't afford the
#
pensions you promised exactly finally there is no free lunch every expert on indian military
#
affairs will tell us that there's something singularly lopsided in the indian military
#
configuration where the bulk of money goes into wages and pensions and there is relatively
#
little money available for equipment and training so you know as an example in china we have seen
#
giant downsizing of the military by about half where they are shifting money away from wages
#
and pensions into equipment and training and that's the most important journey to build
#
military capability in india and instead here we just went in the opposite direction where
#
we significantly increased the fraction of military spending on wages and pensions
#
you know so you asked me what is the pensions discourse like today so i think what we are
#
seeing is this huge burden because of orop and you're seeing many states reversing back to the
#
ops so i think five states in the last one year have announced that you know starting from this
#
state i'm going to now stop contributing to the ops sorry nps and then i'm going to go back to the
#
old pension scheme for my employees now that is a serious cause for concern because one is the
#
fiscal burden that it may put on the state but the second is the lack of information on how is it
#
that they are going to go back to the ops so what does it mean when you say that from today
#
onwards i stop contributing and my employees will now get a pension based on which rules are
#
they going to be the same old rules that your earlier employees were a part of or are you going
#
to design some new rules what are you going to do of the money that you have already put in the nps
#
legally you may not be allowed to take that money from the pfrda because by now it's subscriber
#
money and the pfrda act may not allow the pfrda to actually give access to this money so what is the
#
process by which the state governments are actually going to make this happen and then
#
there is concern that other state governments might follow suit so one pension discourse is
#
this whole fiscal mess of shifting back to the ops and then how do you shift back other states
#
probably shifting back to the ops and then this push by the union that you should not shift to
#
the ops and i think that is the correct stance in this we should not forget that the wage of
#
the worker was raised from 100 to 110 and then 20 went off as the nps contribution so strictly if
#
you want to go back to the ops you need to knock off 10 from the wage okay and i don't know whether
#
states are doing that and if they're not doing that then there's something you know not correct
#
in how they have approached this and the second as renuka emphasized whatever monies have built up
#
for the employee in their nps accounts is the personal wealth of that employee so it may be
#
the decision of a state that now we will no longer contribute to those accounts but that money is not
#
available to the state government that money is the private property of the individual and i don't
#
think anybody who has proposed going back to ops has understood these ramifications and shown
#
a fully articulated strategy on how to navigate this situation i think it's slogans that let's
#
go back to ops but there's a fiscal mess there is this wage question there is the money stranded
#
sitting in the personal accounts how are you going to finance the ops all these questions
#
have not been satisfactorily answered explain to me what is the political impetus for such
#
slogans to come up and for such slogans to actually work like which are the interest
#
groups or constituencies that want to go back to the ops and why is it so popular that parties
#
are pushing it despite knowing it is wrong so it's unclear to me right because the states that have
#
gone back to the ops are the non-bjp states the interest group has to be just the government
#
employees who are now part of the nps but want the 50 of the last wage now from a politician's
#
perspective this is a minor group relative you know in terms of voting so if i want to come back
#
to power how much does this group really matter when i am trying to you know win win elections
#
so it's surprising to me why this has caught on so much traction and why state governments
#
are so keen and make this a poll promise really that if you elect me i'm going to take you back
#
to the ops so i haven't you know quite placed the maths of why this has become such a political issue
#
and it's especially the case where earlier the grand story you told before the break aje was
#
one of uh you know political bipartisanship you know different parties coming together to say
#
that let's do this is good for the country so now for you know certain parties to go back and say
#
no let's go back to the ops and when they full well know what the math behind it and the reasoning
#
behind it it feels odd to me but one possibility amit is the miscalculation of access to nps money
#
so imagine that i am in a bit of a fiscal mess right now for various reasons and if i stop paying
#
to the nps that contribution i save and if i could get access to the amount that is already
#
accumulated then that significantly helps you are a state government yes i'm a state government
#
and if i'm able to access the money that is accumulated for employees of my state then it
#
significantly helps me in my fiscal situation today and you know tomorrow when they retire i'll
#
deal with it tomorrow i don't have to deal with it today if that was the calculation right that
#
could have been the calculation we do not know if that was the calculation then i see what you know
#
why that is valuable but clearly it's not easy to access the money in the nps and the pfrda
#
and the union government have flatly refused as of now and i think that that is the correct
#
stance because really it is you know as ajay said the private wealth of the employee it is his money
#
now and in fact the act does not allow you to take that money so if it's probably a calculation gone
#
wrong but we don't know for sure what i want to know is paint for me in as concrete terms as you
#
can how much of a horrible impact the you know going back to the ops would have for india because
#
when i had did a long episode with jaiprakash narayan his whole thing was like he's had a long
#
long career in public life and he was saying this is the one thing that keeps me up at night it is
#
massive so you know give me a sense of why he was so worried we have old data we don't have current
#
data the paper that was written by surendra davai and gautam bhartavaj showed us that
#
the implicit debt associated with the old pension scheme was of the order of 68 of gdp so in a way
#
when you flip these decisions that take it on take it off the number you're talking about is
#
maybe 68 percent of gdp okay so we've not done that kind of calculation with current data we
#
don't know where it stands no documents released by the government guide us on how to think about
#
this but that gives you a flavor of the magnitudes involved okay or alternatively imagine the nps
#
had never happened okay you take the annual pension payments as we saw them in the late 90s
#
i was saying to you there was an explosive growth in the compound rate of change of the
#
pension payments and those numbers were so explosive that they would just completely
#
disrupt public finance oh and by the way that was not orop okay things are even worse today
#
because for the defense folks now you have orop so if you go back to the ops fully today we are
#
discussing something worse than 68 percent of gdp because now we have orop so these are the
#
magnitudes involved they're staggering magnitudes so we'd have to look at you know one rajasthan
#
at a time or one himachal pradesh at a time and understand the full ramifications public finance
#
at the state level in india does not work very well the states don't face incentives from a
#
bond market where better fiscal behavior generates better access to borrowing or lower interest rates
#
so we're just in a place with bad incentives the states don't care about worsening their fiscal
#
position and then you know maybe i'll say to you that many an election is one with a margin of less
#
than three percent so once this idea took root in the minds of many civil servants in my opinion
#
wrongly that nps was not a good deal then it becomes a vote bank to chase
#
so tell me if i've understood the this correctly ranika from what you were you know talking about
#
what possible incentives could have been one is ajay is making the point that this is not an
#
insubstantial vote bank and etc etc and also i guess your proximate exposure of any politician
#
would be to all the civil servants and government servants around him and you know he might
#
overestimate the impact of it but also there are sort of the fiscal incentives that the cost
#
of going back to ops is in the future you know a future government at a future date perhaps headed
#
by a future party will deal with it they'll deal with it when they deal with it but the benefit is
#
in the present the benefit is in the present in two ways one you're no longer contributing the
#
10 percent or 14 percent or whatever so you save that and the other is if there is a delusion that
#
you can somehow access the nps funds and whatever was contributed by private individuals and should
#
rightfully be theirs but if they are from your state maybe you know that delusion might have
#
been there and i hope it is indeed a delusion and they don't actually sort of get hold of the funds
#
is that an accurate sort of summation and one more there are no researchers there are no there
#
are no researchers explain there's just nobody in the system who studies these things makes
#
data sets writes papers makes calculations the poets around here they don't they write nothing
#
at all they just stand by and let it all be so here's a question i'm guessing that the party's
#
involved you know you yourself describe how you had once given a talk to young congress
#
mps and explained the whole thing to them and uh you know and upa1 after all did so much work
#
making this happen and they were convinced by it but now the congress party itself in these
#
states is pushing hard for it they know it is wrong they know it is disastrous it is not as if
#
they have somehow been convinced and i can't grok that i can't like i understand that you do
#
some things for political imperatives and perhaps you don't understand the economics well enough
#
and therefore you just you know you you focus only on the politics of it but here they understand the
#
economics well enough they know what they're doing wrong they know what they're doing is
#
harmful for the country and they're doing it anyway i mean i what's going on there so i have
#
no personal information or insight into what their reasoning is in recent years my intuition is that
#
this has become high stakes elections so you know winner takes all system the behavior of both sides
#
becomes more and more unpleasant so you know as keelkar always says
#
that political parties should go into the opposition but never go out of power
#
but we in india have increasingly monopolized power in the hands of the executive of the ruling
#
party and then elections become more and more unpleasant for listeners tuning in now i should
#
explain what the keelkar you're referring to is vj keelkar co-author of the wonderful book
#
in service of the republic and you guys have both also sort of done an episode with me
#
there's also a further larger larger question a larger question to the larger question here
#
of sort of the question of means versus ends in politics you know because a rationale for say
#
the amadmi party doing some of what they do like hanuman chalisa and whatever and
#
the congress doing some of what they do would be that look the greater evil is you know whoever
#
is in power we need to remove that particular government and justifies the means and we're
#
going to do it anyway and you know the gandhian position on this and my position on this is that
#
no the end never justifies the means right and that is just flat out such a wrong way of thinking
#
i want to locate this in the phrase that i used high stakes elections in healthy democracies
#
elections have low stakes it's not the life and liberty of the protagonists that is at stake
#
when institutions degrade and the dangers faced by any party that loses become more and more
#
considerable then people become more and more desperate to win elections and then
#
means and ends get degraded so i feel we've got to locate this in the evolution of the republic
#
where i remember in 2004 when manmohan singh became prime minister for some time
#
there was some difficulty on housing for mr vajpayee and mr manmohan singh and vajpayee
#
shared the same house and they had breakfast every day and they talked in a friendly way
#
and that is a healthy environment that is a sound democracy then you get a certain comfort in how
#
elections take place it doesn't become a winner takes all is it bad luck with personalities or
#
a flaw in the design that we are having high-stakes elections ultimately my reasoning
#
about public policy is always that everything comes from formal rules there are lines in the
#
constitution there are lines in relevant acts that have induced maladies so ultimately to
#
solve these things we have to go fix those lines so let's get back to talking about what are the
#
other things that are happening in the pensions universe as it were so of course so one of the
#
things that we just discussed was the fiscal crisis around the shift back to the ops i think
#
the other interesting thing that is happening is how we think about investments and how we think
#
about equity investments and global investments in particular so for example whether you look at
#
the fund managers within the nps or you look at the epfo which is the other big fund manager
#
we are all governed by some sense of some investment guidelines that the respective
#
organizations have put out those guidelines were very restrictive in the beginning only now have
#
been accepted equity investments when actually equity investments are very important to get
#
higher accumulations we are still very averse to investing in global markets and i think that's a
#
big cost because we worry that this is indian money going out and what we are not seeing is the
#
importance of diversification of money and how you know the only free lunch in is is diversification
#
and we are completely cutting off our people from global diversification and i think that's a big
#
problem and i feel like there is absolutely no shift in this position in the last 20 years
#
so we hated sending money abroad then we hate it now at most we are doing a little bit of equity
#
investment but not much more and even when it comes to bonds and government bonds we are still
#
going by these mandates where each institution has to put some 25 percent in certain kinds of bonds
#
and 35 percent in other kinds of bonds and i want to tie it back to what ajay just said which is the
#
incentives that the state governments raising money face because they know that these organizations
#
have to buy their their bonds they have to subscribe there is no differential between a state that is
#
good fiscally and a state that is bad fiscally because hey you know what is the competition
#
in trying to raise funds and who is there on the other side seeing whether you are a better managed
#
state or a worse badly managed stage because everybody has these investment guidelines that
#
they have to adhere to there is an implicit sovereign guarantee and so you know you this
#
whole math just breaks down and i feel that again you know it's one of those sad stories that there
#
has just been absolutely no shift on this position in the last 20 years and i think that that is a
#
problem and so in fact this is not a discourse in pensions but it should fundamentally be there it
#
should be something that all of us are talking about a lot more because the cost you know we
#
always worry about volatility and what if the pensioner or the subscriber loses money but we
#
are not talking about the cost of the subscriber never making enough money because you in you put
#
his money in these you know low investment return type of bonds and you ended up having this economy
#
where there is so much financial repression that you just cannot distinguish between a good state
#
government and a bad state government because the interest rates are roughly very similar so i think
#
that's that's one thing that is not being said and that needs to be said when it comes to exactly
#
as renuka said in the late 90s and early 2000s there was actually a more sane pensions discourse
#
where it was understood that equity investment in a defined contribution system generates those
#
kinds of plausible long-run rates of return that fund dignity in old age without requiring
#
ridiculously high savings rates we came to the subject of global diversification only later
#
renuka has one of the first papers on that subject and there is a huge gain to the
#
worker from having globally diversified equities instead of equities only in india but actually
#
over the last 20 years neither in terms of the implementation of policy nor in terms of the
#
quality of the discourse have things gotten solved in fact they've gotten worse so if you
#
are going to take money and put it into government bonds and a little bit of indian equities
#
then actually the case for dc is weaker so if there are workers saying that we don't like
#
the prospective performance of this nps we can see a bit of that because the arguments and the
#
logic and the calculations that persuaded vajpayee about the move to nps did involve
#
significant amount of equity exposure and of course international diversification is another
#
magic you can improve the reward to risk ratio by about 2x by being in globally diversified equities
#
instead of indian equities but the present indian economic policy establishment does not see
#
opening up to indian assets leaving the country as being part of their macroeconomic and financial
#
strategic thinking two questions and the first one is this that you know ajay you were also
#
part of the group that formulated and i think wrote the very first gst bill or whatever you
#
worked on that and i've always held that the gst the way it was implemented like it's a great
#
concept but the way it was implemented was a disaster and i hate what it is right now and
#
it is just such a nightmare for so many small and medium-sized businesses and there was a big
#
difference there between the dream of the gst and the reality of it and maybe that's another
#
episode at another time though i've had many episodes in the past on the gst which are linked
#
from the show notes and it seems to me that over here also in the mps there is that same problem
#
of dream and reality that you look at the dream and you're looking at okay you have multiple fund
#
managers investing in equities all of this is happening but the reality is that i immediately
#
you know begin to wonder that look why the hell should i put my money here if i can invest it
#
in an index fund i will definitely do better than you know what i'm getting here dog fooding i'm
#
not a customer of the nps you're not a customer of the nps i just go directly to index funds
#
here's my second question for both of you and i started by using the term but both of you have
#
used it extensively in your answers and the term is discourse right and i want to sort of narrow
#
down on that that a discourse of who what do we mean and there are two options one is the policy
#
making elites where the sense is that as you pointed out the discourse in 99 was much better
#
than what it is today and i want to know why it has degraded and the other part of the who the
#
other possible answer is a general public discourse and my question there is that is that public
#
discourse also worth attempting to influencing can it be done and does that also you know what
#
is the importance of that discourse going in the direction that we want because this is such a
#
complex geeky wonky subject that i cannot imagine that the public discourse can come to terms with
#
it it will always come down to simple sloganeering and etc etc so two questions elite discourse why
#
has it degraded and public discourse you know does something need to be done there does it make a
#
difference i think when it comes to elite discourse there is probably a degradation in the
#
the what we are seeing in the research community more generally in terms of the funding that is
#
available for researchers in terms of data sets that are made available in terms of access to
#
various people who might be more openly and willingly able to talk about what is going on
#
well you know in some ways it has gotten better perhaps not in the pension space in some other
#
spaces i think that i so i don't want to be fully pessimistic about this so there are
#
new organizations and new people coming up but certainly in this space i feel that we have
#
we've given up why so let's go back to the 90s late 90s somehow a bunch of people came together
#
okay i described ministry of social justice anand bodiya ap singh i emphasized the unique
#
i emphasize the unique coordinating role of gautam bhartwaj of the invest india economic
#
foundation who raised money from philanthropic sources for organizing research on
#
pension reforms and you know without that this stuff doesn't get done and then the engagement
#
into the dea and that was a proud dea which really was you know top of the game in terms of
#
understanding economics i think i've mentioned in a different show to you that there was a point
#
where keelkar and i put together the economics capability inside that dea and we were better
#
than any other economics organization in india including any academic economics organization
#
in india so that combination of philanthropic funding a coordinating organization in the form
#
of invest india economic foundation the interest and support from the ministry of social justice
#
the passion of menka gandhi anand bodiya ashok pal singh and then the dea team which understood
#
the materiality of pensions and was willing to run with this this whole thing fell apart and in
#
at the time i didn't understand how important these things are but now i understand these things
#
better that the key persons at ministry of social justice all left and then after that ministry of
#
social justice has never been a player again in the work on pensions and there was a brief period
#
of philanthropic money that came into pensions research too many people thought that oh now nps
#
is done so now we don't have to do this anymore and that was completely wrong it's not done until
#
20 years have gone by and then it moved from dea to dfs and whatever research capabilities
#
and experts were there outside government all had their wires running into dea and
#
so when pensions work stopped at dea all pensions work all over india stopped
#
yeah i think i agree with the idea that most of us felt that nps was done and that you know
#
it was all fine but i want to make another point which is that we are relying too much
#
on this small community of people who are the policy wonks or who work on these questions
#
i think the larger sort of research environment in india starting from universities is so broken
#
that that is one reason why you know you have brief moments where some things just work people
#
come together and some magic happens but it's not sustainable because it is not institutional it is
#
just a stroke of luck that some good people came together and the conditions were right and it's
#
not scalable and for anything to be scalable and for us to have a research community that is working
#
on multiple topics and there are new people coming into these research fields all the time
#
means that you need to have an ecosystem of various organizations including universities that
#
are housing some of these intellectual endeavors and i think that is completely missing in this
#
country and so you know often various fields will just degenerate because that muscle is just not
#
there it strikes me that the young thinkers of today are our society's pension for tomorrow in
#
a manner of speaking and as you describe it is kind of tragic if you know that a space is drying
#
up or if you know other incentives are getting in the way yeah amit i think another thing that
#
is happening in this space is that we are in a rush to implement so across the spectrum so there
#
is this view that enough thinking has happened now let's just go and change things and let's
#
just do this very fast because you know india doesn't have time and we have to become you know
#
the big i have a phrase for this it is called bias for action and it is one of the truly toxic
#
things harming the ability to think in india great phrase in the creator economy but i
#
accept that it can be completely the other way around i mean you need both so you need
#
organizations that are more focused on action and you need organizations and communities that are
#
doing some of this deep thinking what has happened is that the latter is missing that is you know the
#
research community is very very broken and whatever new money that you are seeing in the
#
policy community has a bias for action has a bias for impact and now you start getting into deeper
#
questions of what is impact and there you begin to run into the problem of short term versus long
#
term impact the second part of the question the public discourse you know how important is it
#
can it be affected and should we just give up there on complex issues like this so in the late
#
90s and early 2000s that community that i described to you was an elite policy thinking community and
#
an elite media community but i think the work was good enough and the messages were sound
#
and the messages percolated so i remember being surprised at how many people got on board and
#
started by and large understanding and supporting the idea so i don't think it was that difficult
#
to get these ideas out into the mainstream discourse that worked out pretty well but when
#
that policy community dispersed then after that there was nothing then there was a vacuum
#
so i feel it was in the vacuum that various wonky ideas gained prominence certainly fanned and
#
supported by trade unions of civil servants and their whatsapp groups and so on
#
and their whatsapp groups i think i'd like to add it i think it's extremely important to have the
#
public discourse also you know take the example of something that animates people which is
#
guaranteed returns so if you were to just go out on the street and ask people give them a choice
#
between a product that you know is inferior from all technical points of view but it gives you a
#
guaranteed rate of return and you will see that people make that choice and i think that people
#
for example do not understand the cost of the guarantee that they are paying there is a price
#
to be paid for guarantee returns and nobody knows that and part of the reason that nobody
#
knows that is public discourse on this is completely missing and that's where again
#
the big gap is that many many issues where i think public opinion matters and we've just
#
not been able to percolate that message another larger question and i'm going to zoom out a little
#
bit to you know to maybe get some perspective on this at one level what we discussed earlier
#
about the incentives of states it seems to me that states will always have that incentive and
#
it's like a dual incentive and one is that you shift cost to the future so you get benefits now
#
so in that sense going back to the ops is practically a no-brainer you know even if they
#
can't access the nps funds and the other one also is that making sure that costs are dispersed among
#
the people benefits are concentrated and then those flow back to you in terms of political
#
funding or whatever etc etc and given that these incentives exist i would imagine that
#
it is then inevitable that good policies and ideas will get degraded in the way that seems to have
#
happened to this that's you know just the belly of the beast you know what you described earlier
#
was like a perfect storm of people and ideas coming together but it seems to me to be a bit
#
of an outlier given institutional design given the design of the government and the incentives
#
i would not expect that to be the case i would expect that very much to be the exception and
#
perhaps we're lucky we had the exception but it was an exception so but the larger question so i
#
but i don't want to aimlessly kind of lament and rant about this my larger question there is that
#
has such fundamental pension reform worked anywhere else in the world because similar
#
political and bureaucratic incentives would exist in all systems to some extent or the other
#
so hajj so is there a story for hope for us to get inspired by from anywhere else in the world
#
elsewhere in the world in many countries the problem was not just a defined benefit for civil
#
servants but a defined benefit for the population so the conditions in many other countries were
#
way worse than what was present in india and numerous countries have done the switch to dc
#
so this is the problem we faced was not an unusually big problem in fact there was a
#
reasonably easy solution which was for one generation pay both and you are done in other
#
countries they've actually had to suffer the political angst of reneging on the db promise
#
and bringing in a dc but this has been done in many countries not that they are geniuses or
#
anything it is that pension promises are so scary and so destructive of public finance that they had
#
their backs against the wall and in advanced economies you get those robust research communities
#
and the quality of the policy discourse is higher there are less mistakes in policy implementation
#
the kind of story we described about the loss of institutional memory and accumulation of mistakes
#
is more a third world scenario but yeah there are many many countries
#
that have moved mountains on the move from db to dc and yet you know the failures of countries like
#
the united states to solve its social security problem highlight how difficult it is to do
#
so you know illuminating conversation i think i'll listen to this multiple times and kind of try to
#
process all that i've learned in this plenty i've learned at a higher level of how little
#
institutional things or wonky things like pensions and all of that can just you know change the
#
structure of society itself as you described in the first half and equally i hadn't i think
#
realized what a massive sort of problem this is and in my case in my opinion not just a problem
#
of economics but also a problem of politics that we have this move back to an old scheme which
#
will bankrupt future generations you know from a new scheme which was not properly understood so
#
i want to ask you guys like a final question to sort of end which is that if i ask you to look
#
ahead 20 years from now what is the best case scenario and what is the worst case scenario
#
that you see in i guess this context of it playing out but also in a larger context because pensions
#
in one sense are a proxy for how people within a society plan for the future plan for old age how
#
they look at savings how etc etc the structure of their lives so give me your best case and
#
a worst case scenario i think the best case scenario is that we stay on course on nps
#
the states that have reversed to ops find good hybrid schemes for example or come back to the
#
nps and we stay the course so i think that's my best case scenario the worst case scenario
#
on this question is just a complete unraveling that state after state now just you know goes
#
back to the ops and at some point the union also does and then we have the nps architecture
#
only available to citizens of india on a voluntary basis or doing some stuff on informal sector
#
pensions so i think that would be my worst case scenario and then we will have to confront the
#
fiscal problem when it comes yeah so the worst case scenario is that the infection jumps from
#
one state to the next and many more states go this way and potentially the union abandons the
#
nps and then it's practically like the nps reform never happened and just like there was an explosive
#
growth of pension payments in the late 90s you'll get back to an explosive
#
growth in pension payments now just a wee bit worse because of orop so it will be every bit as
#
bad as conditions in 1999 with the kicker of an orop layered on top of it so it'll be an explosive
#
growth in pension expenses which will crowd out other uses of public money that's the worst
#
scenario in the good scenario some people are able to come together and become a thinking
#
community for pensions that's how high the challenge is because nothing less will work
#
this you know lurching from one decision to another doesn't work this stuff is too big
#
and too complex and too important for it to be played day to day on file where some official or
#
the other makes a decision what we need is to get back to a research community a collaboration
#
with the relevant policymakers where there are data sets there are papers there are conferences
#
there is criticism and then the piloting of pension policy comes on to some better ground
#
and then we are actually able to get back to the nps maybe contain the damage at the five or maybe
#
ideally get the five back to an nps and in that case 20 years from now things are looking very
#
good because 20 years from now 2043 is almost at the end of that double payment generation
#
then you start reaping the fruits of the reform then you're not paying at all yeah so whatever
#
people are coming out the pipeline and becoming pensioners are imposing no cost on the government
#
because they're taking their personal pension wealth and going off into the sunset they're
#
decoupled they're de-risked from public finance and all the old ops people would have subsided
#
in terms of the magnitude by payments by 2043 so in the 2040s the nps reform would be a huge
#
source of assistance to the fiscal health of the union government of the state governments
#
but not yet the military folk that's a separate battle to be solved so potentially 20 years from
#
now is the time to be reaping the pension reforms dividend of the seeds of which were planted in
#
2002 so this this is how good it can be this is how bad it can be i propose a date the three
#
of us will get together again here in september 2043 and we'll record an episode and we'll talk
#
about this meanwhile let me end on a note about the public discourse that a friend of mine from
#
delhi or dali or whatever you want to call it he called me the other day and he said
#
so he said fiscal problem i was like i've never known why to talk about fiscal problem government
#
monetary inflation don't know what to say so i was like yes tell me what is the fiscal problem
#
he said i've become very fat i have to go to the gym it's a fiscal problem and on this note
#
renuka and ajay thank you so much for coming on the show i've had such an awesome time
#
last humor of the day the great economist marty feldstein used to always say to me that
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a chronic fiscal problem is like being 100 pounds overweight so you're living you feel you're fine
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you're gorging you're having a good meal but it is hollowing out your body it is destroying your
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health and it is the source of so many other kinds of damage i don't want to fat shame myself but
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just because you're gorging doesn't mean you're gorgeous thank you thank you thank you it was a
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pleasure being here if you enjoyed listening to this episode check out the show note center
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rabbit holes at will also check out the youtube show everything is everything which is on youtube
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at youtube.com slash amit varma my name a m i t v a r m a we've already had 13 episodes out it's
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fantastic do listen you can follow ajay on twitter at ajay underscore sha you can follow renuka on
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twitter at re sanay ring uh r e s a n e r i n g it's also linked from the show notes you can
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follow me on twitter at amit varma a m i t v a r m a you can browse past episodes of the
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scene and the unseen at scene unseen dot i n thank you for listening did you enjoy this episode
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of the scene and the unseen if so would you like to support the production of the show you can go
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over to scene unseen dot i n slash support and contribute any amount you like to keep this
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podcast alive and kicking thank you
