ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Demographic and Social Changes: Issues for the Sixth Central Pay Commission

Inadequate synchronisation of central government service and superannuation rules with a favourable demographic structure and social developments may adversely affect labour and effort of government employees. A slowdown in fresh recruitment has had a negative impact on the system-dependency ratio and the improvement in age-dependency has not resulted in economic benefits. Some recent decisions may exacerbate both inter- and intra-generational equity concerns in employees' compensation. These may have implications for the cost and quality of public services.

SPECIAL ARTICLEfebruary 16, 2008 EPW Economic & Political Weekly54Demographic and Social Changes: Issues for the Sixth Central Pay CommissionMukesh Anand, Saswata ChaudhuryInadequate synchronisation of central government service and superannuation rules with a favourable demographic structure and social developments may adversely affect labour and effort of government employees. A slowdown infresh recruitment has had a negative impact on the system-dependency ratio and the improvement in age-dependency has not resulted in economic benefits. Some recent decisions may exacerbate both inter-and intra-generational equity concerns in employees’ compensation. These may have implications for the cost andquality of public services.Mukesh Anand (manand@nipfp.org.in) is at the National Institute of Public Finance and Policy, New Delhi and Saswata Chaudhury (som0303@gmail.com) is at the Indian Council for Research on International Economic Relations, New Delhi.Analysis of expenditure on wages and salaries and pen-sions and retirement benefits of central government (CG) employees, reveals that the proportion of the former has gradually declined from above 90 per cent in 1950-51 to less than 70 per cent in 2004-05 [Anand and Chaudhury 2007]. Thus the quantum of deferred compensation has grown substan-tially and current compensation accounts for a diminishing proportion of total remuneration. Further, this does not include the medical benefits that would likely raise the proportion of deferred compensation substantially [Nyce and Schieber 2005].11 OutlineThe demographic change of specific concern, in this paper, relates to age-distribution of population. Similarly, a relevant social change relates to increase in womens’ labour force participation. In several subtle ways, these changes impact the passivity ratio, dependency ratio and replacement ratio.2 Passivity ratio is the ratio of number of post-retirement years (until death) to number of working years; dependencyratio is the ratio of number of old (non-workers) to number of young (workers); replacement ratio is the ratio of compensation or payment in old age (non-working years) to the payment in youth (working years). These three para-metric ratios profoundly influence the sustainability of a pensions programme [Anand 2007; Whitehouse 2007]. These also carry signals that set incentives for individuals in exercising their choice of employment in government service. In Section 2, we highlight the relatively slow paced adjustment of normal age of superannu-ation to improvement in expectation of life. This has steadily raised passivity ratio in CG services. Improvement in longevity along with change in fertility impacts population age-distribution that, in turn, determines the dependency ratio. An analogy for (system) dependency in central government employees (CGE) is detailed in Section 3. Section 4 discusses liberalisation of superan-nuation benefits that has raised the proportion of deferred com-pensation (replacement ratio), in CG service, higher than ostensi-bly desired.3 Technological change induced skill requirement and change in womens’ labour force participation influence group and gender composition of CGE. These are discussed in Section 5. Sec-tion 6 concludes by highlighting additional issues concerning inter- and intra-generational equity.2 Life Expectancy and Age of Superannuation Change in the normal age of superannuation in central govern-ment service shows (Table 1, p 55) an increase of five years over a period of six decades.

80 20

2002

0 20 40 60 0 5 10 15 1971
5 5.5 6 6.5 7 -0.1 0.4 0.9 1.4 1.9 2.4 Annual s

1901 1921 1941 1961 1981 2001

2026 2021 2011 2001 1991

0 200 400 600 800 1000 1200 80 60 40 20 0

Local bodies Central government Quasi governmen State government

1960-61 1966-67 1972-73 1978-79 1984-85 1990-91 1996-97 2002-03

SPECIAL ARTICLEEconomic & Political Weekly EPW february 16, 200857Importantly, the structure of CGE has undergone perceptible change over the decades. Technological advancement has induced a decline in number and proportion of group D employees, especially in civilian services from 56.30 per cent in1957 to 27.27 per cent in 1994 [GoI 1997: 230). It is likely that this proportion would continue to decline. On the other hand, there has been a rapid expansion in number of group C employees, with sanctioned posts almost quadrupling between 1957 and 1994.In the medium term, it is likely that need for group B workersmay rise. The (observed) average age on joining serviceis likely to be higher in upper hierarchical groups. But employees, especially in group A, also move along a steeper compensation profile. Ceteris paribus, therefore an increase in the proportion of employees in upper hierarchical groups would gradually push up the per worker (average) cost of govern-ment employment. While our estimates of the replacement ratio are based on average current compensation, most pensioners derive benefits based on compensation that are likely closer to maximumof the range (for a group). This is likely to raise replace-ment ratio further.6 ConclusionsThe FPC alluded to right-sizing ofCGE and had also indicated existing slack, leading to over employment and therefore ineffi-ciency (in terms of costs) of government operations. Figure 4 suggests that decline in the number of employees had started earlier, but gained acceleration in the post-FPC era.Most public services directly impacting daily life are in the domain of the states, but a whittled down size of CG may not be able to provide the requisite level or quality of service for presently expanding population. Anecdotal evidence indicates the growing incidence of ad hoc appointments encouraging infor-malisation and largely directed at denial of social security and retirement benefits. This creates more classes of employees than envisaged, and obscures expenditures relating to employee compensation in government service.The slowdown in new recruitment raises the average age of current workers. In addition, an improvement in life expectancy, beyond the age of retirement, adversely impacts the system dependency ratio. For any given age of superannuation, maintain-ing the number of employees, by hiring fresh recruits at the rate of new retirees, may have an adverse impact on expenditure towards employees’ compensation. Given the cornucopia of retirement benefits (gratuity, leave encashment, commutation of pension, etc) rough estimates suggest that (deferred) compensa-tion received in the first year of retirement exceeds thrice the final year salary compensation. Further, given the extant pay structure, it is likely that total wage compensation to a young entrant in a given group, may be less than compensation of a new retiree from that group.The rules governing deferred compensation should be urgently amended incorporating favourable demographic developments. In particular, extant full service stipulation of 33years appears to be redundant, when it is easily exceeded by the average (expected) working life. However, more debate Annexure B: Liberalisation of Retirement BenefitsTable 1 enlists some attributes reflecting liberalisation of rules governing retirement benefits. No rule signalling stringency could be deciphered.Table B1Attribute Pre-FPC Pensioner Post-FPC PensionerPension ceiling 4,500 INR per month 50% of highest payParity in respect of old pensioners No 50% of the revised scale for all pensionersGratuity ceiling 2.5 lakh INR 3.5 lakh INRGratuity calculation includes dearness allowance No YesCommutation proportion one-third 40%Dearness relief 50%, partial relief for 100% neutralisation for all family pensioners penionersFamily pension rate(s) Slabs of 30, 20 and 15% Uniform 30%Family pension ceiling 1,250 INR per month 30% of pay for all categoriesDependant parents, widowed/ Not eligible for family “included in the definition of divorced daughters pension family” for purpose of family pensionDearness relief for re-employed pensioners and employed family pensioners NotpermittedAllowedMedical allowance Nil 100 INR for eligible pensioners not covered under CGHSLeave encashment up to 240 days up to 300 daysINR, Indian RupeesSource: GoI 2002.Annexure A: Hypothetical Scenarios to Estimate Passivity RatioWe assume that an average worker in the year 1921 joined civilian service at age 20. Corresponding age on joining service is 22 and 25 years respectively in 1963 and 2006. The fourth example is of a de-fence personnel joining service at a relatively lower age. Table A1 then tracks these individuals, assuming that each worker provides full service up to normal age of retirement (reduced for defence person-nel) [Unnithan 2007] and lives full average expected life.Note that full-service period is rendered ineffective in all cases, as expected working life upon joining service is longer than full service period. To encourage merit, increase in full service period stipulation may need to exceed increase in the age of retirement.Table A1: Hypothetical Central Government EmployeeAttribute CivilDefence IIIIIIIVDate of birth July 1, 1901 July 1, 1941 July 1, 1981 July 1, 1981Age at joining service (years) 20 22 25 18Date of joining service July 1, 1921 July 1, 1963 July 1, 2006 July 1, 1999Normal age of superannuation upon joining service (years) 55 58 60 40Expected date of retirement July 1956 July 1999 July 2041 July 2021Expected working life 35 36 35 22Expectation of life at birth (years) ~ 24 ~ 32 ~ 54 ~54Expectation of life on joining service (years) ~ 25 ~ 36 ~ 42 ~49Change in normal age of superannuation No Change 60 (in No Change No Change May1998)Actual working life No Change 38 No Change No ChangeDate of retirement July 1956 July 2001 July 2041 July 2021Full service period (years) 30 33 33 Expectation of life upon retirement ~ 14 ~ 16 ~ 20 ~ 33Passivity ratio-narrow (PR-N = years in retirement/years of work) 0.40 0.42 0.57 ~ 1.5Passivity ratio-broad (PR-B = non-earning years/earning years) 0.97 1.00 1.29 ~ 2.3Expectation of life figures relates to males. However, there are marked differences in life expectancy between males and females, and between rural and urban areas.

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