Saturday 30 March 2013

Inflation-Indexed Universal Pension - Dumb Idea


Inflation-Indexed Universal Pension - Dumb Idea




Jairam Ramesh advocates inflation-indexed Universal Pension for all - Read on:


At a superficial level, this may sound like a rather appealing idea in a society with zilch social security, especially in a society with a gradual breaking down of the "once-upon-a-time-famous-joint-family-system".

I disagree, and I disagree strongly. Just look under the skin and you'll realise that it is a dumb idea that helps nobody (not even the politicans who may expect to win elections with such an idea). Here are my reasons:

  • First, where's the money? Considering our present fiscal deficit figures, we can't afford to take up an elaborate inflation-indexed universal pension scheme (hereafter referred to as the IIUP in the rest of this blog post). If we launch such an IIUP, we'll directly sow the seeds of hyper inflation
 
  • Do we plan a "tokenist" IIUP - That will be worse than the disease, because an insufficient sum will, on the one hand, be insufficient, and on the other hand, will whet the appetite adequately to provoke other political parties (in a predictably populist fashion) to enhance the IIUP in the guise of making it more meaningful.
 
  • Having an old-age pension for destitutes, physically / mentally challenged individuals, sick persons and the like may be considered, subject to availability of resources. Even here, a voucher system enabling them to obtain essential goods and services would be better than a pension, simply because cash is fungible, and can both be misused (say, for alcohol, for instance) or misappropriated (say, by the local panchayat president, or, more likely, their own kith and kin).
 
  • IIUP will have two critical moral hazards. First, it will make the citizens to lose the urge to plan and save for retirement. Second, it will motivate them to either become lazy or to become spendthrifts during their earning years, knowing fully well that the state would take care of them in their old age.
 
  • Today, it is possible that the number of senior citizens is at a "manageable level". Even this is a moot point. However, in a few decades, the present day baby boomers will grow old, and, like many of the European nations and the US, India too will face a problem of too many old mouths to feed and too few young hands to work. How will the government be able to honour its IIUP commitments then? What's the point in creating an IIUP now and converting the same into a ticking time bomb which will explode in the faces of our future generations?
 
  • Interestingly, it may not even be such a great idea politically - even for the short term. After all, if the Congress Party can promise IIUP, nothing prevents either the BJP or the regional parties to come up with even more fiscally imprudent and outrageous promises. And God forbid, if a party that promises IIUP gets elected, they'll have to face the wrath of the people either way - If they don't implement IIUP, for reneging on their promises. If they don't, for causing hyper-inflation. Both of which will ensure that they lose the confidence of the very same people to win whose votes schemes such as IIUP are thought of in the first place!
 
Hence, it is best if the idea of IIUP is simply dropped - while they still can! If any politican has any doubts, I would suggest that they ask any past or present Petroleum minister as to the problems they face due to subsidies given on Kerosene and LPG cylinders!

Regards,

N




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