Demographic and social changes: issues for the sixth central pay commission
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special article
Demographic and Social Changes:
Issues for the Sixth Central Pay Commission
Mukesh Anand, Saswata Chaudhury
A
Inadequate synchronisation of central government nalysis of expenditure on wages and salaries and pen-
service and superannuation rules with a favourable sions and retirement benefits of central government (CG)
employees, reveals that the proportion of the former has
demographic structure and social developments
gradually declined from above 90 per cent in 1950-51 to less
may adversely affect labour and effort of government than 70 per cent in 2004-05 [Anand and Chaudhury 2007]. Thus
employees. A slowdown in fresh recruitment has had a the quantum of deferred compensation has grown substan-
negative impact on the system-dependency ratio and tially and current compensation accounts for a diminishing
proportion of total remuneration. Further, this does not include
the improvement in age-dependency has not resulted
the medical benefits that would likely raise the proportion of
in economic benefits. Some recent decisions may deferred compensation substantially [Nyce and Schieber 2005].1
exacerbate both inter- and intra-generational equity
1 Outline
concerns in employees’ compensation. These may have
The demographic change of specific concern, in this paper, relates
implications for the cost and quality of public services.
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; dependency ratio 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.
Mukesh Anand (manand@nipfp.org.in) is at the National Institute 2 Life Expectancy and Age of Superannuation
of Public Finance and Policy, New Delhi and Saswata Chaudhury Change in the normal age of superannuation in central govern-
(som0303@gmail.com) is at the Indian Council for Research on ment service shows (Table 1, p 55) an increase of five years over a
International Economic Relations, New Delhi.
period of six decades.
54 february 16, 2008 EPW Economic & Political Weeklyspecial article
The last increase in normal age of superannuation, by two probably raised the proportion of the elderly (60+ years) in the
years, was introduced after almost four decades in 1998. In the population and gradually worsened old-age dependency ratio. In
interim, significant improvements were achieved in expectation contrast, fertility decline in the last two decades has lowered the
of life. Data from the Sample Registration System (SRS) [Regis- proportion of young dependents. Figure 3 depicts the population
Table 1: Normal Age of trar General of India 2006] shows that, dependency ratio for two differing combinations of age groups. It
Superannuation (years) expectation of life at birth was 49.7 years in portrays an improvement in (lowering of) dependency ratio, that
Period Age
1975. This increased by 12.8 years to 62.5 is expected to bode well
1938 to 1962 55
years in 2002, an increase of almost 26 per for growth in output (and Table 2: Economic (or Worker) Dependency Ratio
1962 to May 13, 1998 58 Census NSSO
cent in as many years (Panel A, Figure 1). hence income). Year Dependants Year Dependants
May 13, 1998 onwards 60
Source: GoI (1997), Muthuswamy Over the same period expectation of life A more relevant measure Per 1000 Per 1000 Workers
Workers PS + SS PS
and Brinda (2002).
at 60 increased by 3.4 years (from 13.8 to however, is the ratio of
(1) (2) (3) (4) (5)
17.2, Panel B, Figure 1) and, that at 70 increased by 2.5 years number of non-workers
1961-62 1328 1977-78 1364 1695
(from 8.9 to 11.4), an increase of 25 and 28 per cent respectively.4 (non-earners) to number
1971-72 2037 1983-84 1381 1674
Slow adjustment of normal age of superannuation, in relation of workers (earners), that 1981-82 1725 1987-88 1427 1740
to improvement in life expectancy, is manifest in an increase in is, a measure of economic 1991-92 1667 1993-94 1381 1667
the number of pensioners drawing benefits (this is discussed dependency (Table 2). 2001-02 1558 1999-2000 1519 1740
further in the next section). Alternatively, this is an adverse In any case, economic 2003-04 1375 1625
Figure 1: Expectation of Life at Birth and at Age 60, Male and Female (in Years) dependency is much higher (1) PS, Principal Activity Status; SS, Subsidiary Activity Status.
Panel B:B:At Age6060 (2) Census figures portray a decline in economic dependency
80
Panel A: At Birth
20
Panel At Age
2002
(worse) than age-depend- over the past four decades. However, such a trend is not seen
60 1991
2002 1991
2002
15 1991
2002 1991
1971
ency. Segregating the in National Sample Survey Organisation data, especially upon
1971 excluding workers with subsidiary status (col 5).
1971 1971
1951
1951 population into the age Source: Authors’ own computations. Basic Data: Census of India;
40 1951 1951 10
groups 0-19, 20-64 and GoI (2001, 2005).
20 5
65-plus (instead of 0-14,
0 0
Male Female Male
1 Female
2
15-59 and 60-plus) years raises (that is, worsens) the age-depend-
1 2
Figure pertains to five year moving average ending with year shown. ency ratio, but it is still far below the estimate for economic
Source: GoI 2005; Census of India 2001 (Population Projections).
dependency (compare Table 2 and unshaded bars in Figure 3).
outcome of a rapid increase in the passivity ratio5 that profoundly However, any realistic assessment of dependency should account
impacts the proportion of expenditure on present and ex-employ- for a gradual shifting out of average age of entry into the labour
ees. An increase in the passivity ratio, ceteris paribus under a force, as well as the likelihood of a longer spell in the labour
defined benefit (DB) system of pensions, would continually raise force, commensurate with improvements in average educa-
the proportion of deferred compensation. On the contrary, under tional achievement, health and longevity.
a defined contribution (DC) system, it re-exposes individuals to
longevity risk.6 Public policy, therefore, should devise acceptable 4 Retirement Benefits and Replacement Ratio
norms to circumscribe passivity (see Table A1, p 57). In addition, The rules governing retirement benefits for CG employees have
the passivity ratio based on superannuating pensioners only, may been continually liberalised and the social security net has
be an underestimate as it is unadjusted for survivor pensioners. expanded (Table B1, p 57). Not only the quantum of benefits,
These and other issues relating to liberalisation of retirement but also the domain of beneficiaries has been expanded.
benefits are discussed in Section 4. Figure 2: Growth of Total Population and of Elderly While improved estimates are desirable,
2.4 7 crude projections suggest that, for an
3 Elderly Population and 1.9
Annual average growth
individual, deferred component con
preceding decade 6.5
Dependency Ratio (%, left scale) stitutes more than one-third of total life-
1.4
Over the last century, the population has 6 time compensation. If one includes
0.9 Annual average growth
grown at an average annual rate of 1.47 since 1901 (%, left scale)
5.5
medical benefits, then perhaps the
0.4
per cent per annum. However, the 60 + population (%, of total,
right scale)
deferred component may be upward of
-0.1 5
compounded annual average growth rate 1901 1921 1941 1961 1981 2001 two-fifths. Coupled with secure service
(CAGR) of 0.83 per cent between 1901 Source: Authors’ own computations, Basic Data: Singh et al 1989; Census of India. conditions, such a structure of com
and 1951, was significantly lower than Figure 3: Age Dependency Ratio (per thousand persons) pensation leads to perverse incentives
2.11 per cent between 1951 and 2001. The 1991 and perhaps induces conservatism in
growth in population was at its peak 2001 work effort.
acceleration in the 1950s. The rate 2011 Inadequate appreciation of the fiscal
plateaued in 1960s and, has declined 2021 impact of the change in rules governing
since then (left-hand scale in Figure 2). 2026
retirement benefits appears as a major
High fertility rates around the middle lacuna. The Fifth Pay Commission (FPC)
0 200 400 600 800 1000 1200
of the last century combined with 0-14 and 60 + 0-19 and 65 + had recommended raising the proportion
improvement in expectation of life at Dependency per thousand persons between 15-59 (20-64) years. of commutation to 40 per cent of pension
Source: Authors’ own computations. Basic Data: Census of India 2001 (Population
older ages, (Panel B, Figure 1) has Projections). and to reduce length of restoration
Economic & Political Weekly EPW february 16, 2008 55speciAl article
period to 12 years. The latter though was left unchanged at superannuation. Thus, w idening the domain of the social
15 years. It is likely that in the last few years a significant security net is likely to have a multiplicative effect on the effec-
proportion of pensioners have become eligible for restoration tive replacement ratio.8
of the commuted amount. While no confirmed data is availa-
ble, this is arguable given that life expectancy at age 60 5 Gender and Group Composition
exceeds 15 years (Figure 1, Panel B). The discussion in the preceding sections focused on age
Table 3: Replacement Ratio: Moreover India, perhaps, is the only (demographic) dimension. However several social changes have
CG Employees Joining Service
in 1961-62 (in %) (or, one of few) country(ies) that also occurred in the interim. Two such changes are likely to
Age of allows for such restoration of contribute significantly towards correcting intra-generational
Superannuation 60 62 65
Age of Joining commuted amounts. inequity. The first relates to increase in women’s participation,
Service While not a precise representation, and second to changes in structural composition of CG
23 53 43 30 Tables 3 and 4 present replacement workforce.
25 55 44 31 ratios for two differing hypothetical
27 55 46 32 cases of individuals in CG services. 5.1 Women’s Participation
Source: Authors’ own computation.
The average (annual) salary is The proportion of women workers in CG civilian services in
Table 4: Replacement Ratio: CG projected, based on trend rate of 1979-80, 1980-81 and 1981-82 was (roughly) 3.53, 3.64 and 3.80
Employees Retiring in 2002-03
(in %)
growth (3.54 per cent per annum per cent respectively [GoI 1991]. As per the report of the FPC,
Age of at constant 1999-2000 prices) of there were 2.83 lakh women workers constituting 7.51 per cent of
Superannuation 60 62 65 average salary compensation between CG civilian workers. It is likely that, in the intervening period
Age of Joining
1961-62 and 2002-03 [Anand and since 1993-94, the number of women workers in CG services has
Service
23 57 47 34
Chaudhury 2007]. The annual increased. But, the occupational exigencies of its largest two
25 59 48 35 average pension payment is estimated employers, namely, railways and defence may be inhibiting, even
27 61 50 36 as 50 per cent of current wage if newer vistas are also opening up there for women.
Source: Authors’ own computation. compensation.7 Replacement ratios As per the latest data (for the year 2002) from the SRS [Regis-
are estimated as cumulated deferred trar General of India 2006], life expectancy at birth for females
compensation during years in retirement as a ratio of cumulated exceeds that for males by about Table 5: Difference in Life Expectancy
salary compensation. 1.7 years (Table 5). (Years) at Various Ages, 2002
Table 3 pertains to individuals of differing ages joining service In India, the normal age of Age At Birth 20 30 60 70
(Female minus Male)
on the same date in 1961-62 and Table 4 pertains to individuals superannuation is identical for
Expectation of Life 1.7 3.1 3.3 2.0 1.3
retiring on the same date in 2002-03. Along the columns of each males and females (gender Source: Authors’ own computations; Basic Data: Same
table, one may read-off the replacement ratio for individuals neutrality).9 Ceteris paribus, as Figure 1.
joining service at differing ages, given some mandatory age of an increase in proportion of females, in CG employment, is likely
superannuation (60, 62 or 65 years). Conversely, figures along to raise replacement ratio, largely due to some increase in average
the rows are replacement ratios for individuals joining service at passivity ratio.
a particular age but retiring at differing mandatory age of super- Wider participation of women is likely to improve (lower) the
annuation. The replacement ratio along a column increases economic dependency ratio. Further, there is significant evidence
largely due to an increase in passivity ratio. On the contrary, that an increase in female labour force participation boosts
movement along a row mimics a decline in passivity, inducing a economic growth and development [Nyce and Schieber 2005].
decline in the replacement ratio. However, if not complemented adequately with enabling provi-
For ease of exposition, assume that expectation of life, at sions, there is the likelihood of an adverse impact on fertility.
age 60, is 15 years for those joining service in 1961-62. The This in turn may have an adverse impact on future economic
corresponding expectation of life for those retiring in 2002-03 dependency ratio.
is 16 years. Between Tables 3 and 4, one observes an increase
in t he replacement ratio for the corresponding cells. Note 5.2 Group Composition
that an improvement in expectation of life by one year, without The size of CGE expanded in 1960s and early 1970s (Figure 4).
any change in the mandatory age of superannuation, raises This bulge, in employee intake then, has likely resulted in a
the passivity ratio and consequently ballooning number of superannuating
the replacement ratio. Note also that Figure 4: Number of Public Sector Workers (in lakhs) pensioners in the 1990s. While a more
80
these are conservative estimates of detailed study is desirable, past employ-
expectation of life and thus provide a 60 State government
ment trends hint that growth in number
Quasi government
lower bound for the true replace Central government
of pensioners from CG services maybe
ment ratio. Given our assumptions, 40 plateauing soon. This is also borne out
ceteris paribus, a one-year improve 20 by relatively slow growth in pension
ment in expectation of life raises the Local bodies expenditure in recent years, even if
replacement ratio by approximately 4 0
1960-61 1966-67 1972-73 1978-79 1984-85 1990-91 1996-97 2002-03
improvement in expectation of life has
per cent, for a given mandatory age of Source: GoI 2005. led to cumulation of pensioners.
56 february 16, 2008 EPW Economic & Political Weeklyspecial article
Importantly, the structure of CGE has undergone perceptible Annexure A: Hypothetical Scenarios to Estimate Passivity Ratio
change over the decades. Technological advancement has We assume that an average worker in the year 1921 joined civilian
induced a decline in number and proportion of group D service at age 20. Corresponding age on joining service is 22 and 25
employees, especially in civilian services from 56.30 per cent years respectively in 1963 and 2006. The fourth example is of a de-
in 1957 to 27.27 per cent in 1994 [GoI 1997: 230). It is likely fence personnel joining service at a relatively lower age. Table A1 then
tracks these individuals, assuming that each worker provides full
that this proportion would continue to decline. On the other
service up to normal age of retirement (reduced for defence person-
hand, there has been a rapid expansion in number of group C nel) [Unnithan 2007] and lives full average expected life.
employees, with sanctioned posts almost quadrupling between Note that full-service period is rendered ineffective in all cases, as
1957 and 1994. expected working life upon joining service is longer than full service
In the medium term, it is likely that need for group B period. To encourage merit, increase in full service period stipulation
may need to exceed increase in the age of retirement.
workers may rise. The (observed) average age on joining
Table A1: Hypothetical Central Government Employee
service is likely to be higher in upper hierarchical groups. But
Attribute Civil Defence
employees, especially in group A, also move along a steeper I II III IV
compensation profile. Ceteris paribus, therefore an increase in Date of birth July 1, 1901 July 1, 1941 July 1, 1981 July 1, 1981
the proportion of employees in upper hierarchical groups Age at joining service (years) 20 22 25 18
would gradually push up the per worker (average) cost of govern- Date of joining service July 1, 1921 July 1, 1963 July 1, 2006 July 1, 1999
ment employment. While our estimates of the replacement ratio Normal age of superannuation upon
are based on average current compensation, most pensioners joining service (years) 55 58 60 40
Expected date of retirement July 1956 July 1999 July 2041 July 2021
derive benefits based on compensation that are likely closer to
Expected working life 35 36 35 22
maximum of the range (for a group). This is likely to raise replace-
Expectation of life at birth (years) ~ 24 ~ 32 ~ 54 ~54
ment ratio further.
Expectation of life on joining service (years) ~ 25 ~ 36 ~ 42 ~49
Change in normal age of superannuation No Change 60 (in No Change No Change
6 Conclusions May 1998)
The FPC alluded to right-sizing of CGE and had also indicated Actual working life No Change 38 No Change No Change
existing slack, leading to over employment and therefore ineffi- Date of retirement July 1956 July 2001 July 2041 July 2021
ciency (in terms of costs) of government operations. Figure 4 Full service period (years) 30 33 33
suggests that decline in the number of employees had started Expectation of life upon retirement ~ 14 ~ 16 ~ 20 ~ 33
Passivity ratio-narrow (PR-N = years in
earlier, but gained acceleration in the post-FPC era.
retirement/years of work) 0.40 0.42 0.57 ~ 1.5
Most public services directly impacting daily life are in the Passivity ratio-broad (PR-B = non-earning
domain of the states, but a whittled down size of CG may not be years/earning years) 0.97 1.00 1.29 ~ 2.3
able to provide the requisite level or quality of service for Expectation of life figures relates to males. However, there are marked differences in life expectancy between
males and females, and between rural and urban areas.
presently expanding population. Anecdotal evidence indicates
the growing incidence of ad hoc appointments encouraging infor- Annexure B: Liberalisation of Retirement Benefits
malisation and largely directed at denial of social security and Table 1 enlists some attributes reflecting liberalisation of rules governing
retirement benefits. No rule signalling stringency could be deciphered.
retirement benefits. This creates more classes of employees than
Table B1
envisaged, and obscures expenditures relating to employee
Attribute Pre-FPC Pensioner Post-FPC Pensioner
compensation in government service.
Pension ceiling 4,500 INR per month 50% of highest pay
The slowdown in new recruitment raises the average age of Parity in respect of old pensioners No 50% of the revised scale for all
current workers. In addition, an improvement in life expectancy, pensioners
beyond the age of retirement, adversely impacts the system Gratuity ceiling 2.5 lakh INR 3.5 lakh INR
dependency ratio. For any given age of superannuation, maintain- Gratuity calculation includes
dearness allowance No Yes
ing the number of employees, by hiring fresh recruits at the rate
Commutation proportion one-third 40%
of new retirees, may have an adverse impact on expenditure
Dearness relief 50%, partial relief for 100% neutralisation for all
towards employees’ compensation. Given the cornucopia of family pensioners penioners
retirement benefits (gratuity, leave encashment, commutation of Family pension rate(s) Slabs of 30, 20 and 15% Uniform 30%
pension, etc) rough estimates suggest that (deferred) compensa- Family pension ceiling 1,250 INR per month 30% of pay for all categories
tion received in the first year of retirement exceeds thrice the Dependant parents, widowed/ Not eligible for family “included in the definition of
final year salary compensation. Further, given the extant pay divorced daughters pension family” for purpose of family
pension
structure, it is likely that total wage compensation to a young
Dearness relief for re-employed
entrant in a given group, may be less than compensation of a new pensioners and employed family
retiree from that group. pensioners Not permitted Allowed
The rules governing deferred compensation should be Medical allowance Nil 100 INR for eligible
pensioners not covered under
urgently amended incorporating favourable demographic CGHS
developments. In particular, extant full service stipulation of Leave encashment up to 240 days up to 300 days
33 years appears to be redundant, when it is easily exceeded by INR, Indian Rupees
Source: GoI 2002.
the average (expected) working life. However, more debate
Economic & Political Weekly EPW february 16, 2008 57speciAl article
should precede an upward revision of this stipulation, to vulnerability in ensuring adequate provisioning for old age
incentivise service period contribution as also productivity and expenditure needs. Whether this holds incentive, to attract and
efficiency. retain merit, appears questionable. The issue of inter-genera-
tional equity calls for some balance between current and deferred
Circumscribing Inequality compensation. The maxim of “one-post one-pay” (or one-rank
In sharp contrast to the former defined benefit (DB) pension plan, one-pay) appears to be grossly violated not only between workers
new recruits in (non-military) government service from January and retirees, but also among current workers.
1, 2004, are members of a defined contribution (DC) pension plan. Responsible governments should ensure that those employed
Under the DC plan of the new pension system (NPS), individuals by them are empowered with sufficient financial capacity for a
mandatorily contribute 10 per cent of their pay, matched by an decent living. While there is little likelihood of a consensus on
equal contribution by government into an individual retirement a desirable ratio between the maximum and minimum pay
account. While employer’s contribution adds to government’s (disparity ratio), circumscribing inequality is desirable for
present expenditure, individual contribution lowers the net pragmatic reasons. The disparity ratio varied between 54.5 and
present remuneration of new recruits as compared to those in 37.5 during the spell of the First Pay Commission, and was
service before January 1, 2004. This drives a wedge in current brought down to 10.7 by the Fourth Pay Commission [GoI 1973
compensation of present workers. and 1997]. The FPC retained this ratio, but care should be
In the extant form deferred remuneration of new recruits is exercised that there ought to be sufficient disincentives to prevent
inadequately assured. Pre-funding strategy of the NPS, pending dilution in the hierarchical relationships for smooth functioning
the passage of the Pension Fund Regulatory and Development of government machinery (both, across public and private
Authority bill by Parliament, fails to ameliorate individual sectors, as well as within public sector).
Notes 9 In several countries [Castel and Fox 2001] on the Unit, Department of Expenditure, Ministry of
contrary, it is lower, for females, for example, Finance, New Delhi.
1 Lifetime healthcare costs tend to cluster dispro-
Kazakhstan, Kyrgyz Republic, Latvia, Moldova. – (1997): Report of the Fifth Central Pay Commis-
portionately in a relatively brief period before
death. sion, Ministry of Finance, New Delhi, January.
2 Several variants may be used while estimating References – (2001): An Assessment of Government of India’s
these ratios. For example, passivity ratio may be Pensionary Liability, Ministry of Finance, p 8.
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the ratio of the sum of years until joining the work
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force and years in retirement, to number of work-
Oxford University Press, New Delhi, India, pp 391-94.
ing years, dependency ratio may be the ratio of – (2005): Statistical Abstract, India, 2004, Central
non-earners to earners, replacement ratio may Anand, Mukesh and Saswata Chaudhury (2007): Statistical Organisation, Ministry of Statistics
be the ratio of net (of taxes) compensation during ‘Government Employment and Employees’ Com- and Programme Implementation, New Delhi,
non-working years to net compensation during pensation: Some Contours for the Sixth Central
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Volume XLII, No 31, August 4-10, pp 3225-32. – (2001, 2005): Report Number 506 and 458,
3 The report of the High Level Expert Group [GoI National Sample Survey Organisation, Ministry
2002] also lamented that “This has resulted in en- Castel, Paulette and Louise Fox (2001): ‘Gender Dimen-
of Statistics and Programme Implementation,
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New Delhi.
entitled to on retirement...”, especially in the con- Union’, Ch 12 in Holzmann Robert and Joseph E
Stiglitz (eds), New Ideas About Old Age Security: Muthuswamy, P and V Brinda (2002): Swamy’s
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of life at birth, in India, was less than 25 years, al- Economic Implications of Aging Societies: The Costs
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ilous situation was reversed only in the census of and Census Commissioner, India. Unnithan, Sandeep (2007): ‘Defence: The Talent
1931. Since then expectation of life, at all ages, GoI (1973): Report of the Third Central Pay Commis- Marches Out’, India Today, April 23, pp 34-36.
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5 Broadly defined, passivity ratio constitutes sum of – (1991): Brochure on Pay and Allowances of Central Retirement-Income Systems in 53 Countries, World
two phase components, one prior to entering la- Government Civilian Employees, Pay Research Bank, Washington DC.
bour force and another upon exiting from it. The
latter component pertains to (prevalent) narrow
definition.
6 This connotes a situation where people outlive
savings cumulated during their income-earning
years.
7 The ostensible rule for pension payments ensures Unbound Back Volumes of Economic and Political Weekly from 1976 to 2007 are available.
a monthly pension of 50 per cent of emoluments
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full service (currently stipulated at 33 years).
However, this is likely an underestimate, as
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