Introduction

Pensions have been increasingly used as a political tool especially in the context of ageing population where the population above 60 years constitutes a major segment of voters. Sometimes both the government and opposition parties have played the game each trying to outbid the other. The prime objective is to win elections with fabulous proposals; the cost and impact on the budget are not quantified. The higher the “surenchere” the higher the cost will be. The motivation is political but the economic cost is colossal. In this article we look at the growth of pensions and analyse to what extent they are related to a number of parameters, a comparison that indicates their sustainability or otherwise.

🔹 BRP Trends

The Basic Retirement Pension increased systematically in the seventies to reach Rs 122 in 1980 after staying put at Rs 22 from 1957 to 1971. It increased sharply between 1980 and 2000. In the first decade (1980- 90) the increase was 228% from Rs 122 to Rs 400 and in the second decade (1990-2000) it increased further to Rs 1500, or by 275%. The annual increase was 12.6% and 14.1% respectively. The huge percentage increase is due to the low base effect since BRP was low in absolute terms. These were periods of relatively high economic growth which enabled the sharing of fruits of development. It is worth adding that the universal pension rate was standard up to 1983 when there was a differentiation for persons above 75.

Between 2000 and 2010 the BRP grew at one digit level annually but doubled from Rs 1,500 to Rs 3,048. It maintained this trend to reach 3,623 by 2014.

Pensioners also benefited from higher pensions due to the revision of pensions in line with the adoption of additional remuneration following tripartite negotiations. It thus became customary for pay compensation to be extended to old age pensions.

Following the elections in 2014 and the implementation of the electoral promise to raise the pension to Rs 5,000 the BRP jumped by Rs 1,377 or by 38%. 2015 marked a break from the past. The increase was substantial but still manageable with limited impact on the budget. In fact, the actual increase worked out at Rs 777 if we take into account the additional remuneration of Rs 600 (Rs 777+ Rs 600= 1,377) that was paid to workers in January 2015. Thereafter, pensioners continued to benefit from the increase due for inflation until 2019 when the BRP had reached Rs 6,210.

But then we entered an era of wild populist and demagogic decisions. Pensions increase proved to be a winning formula for elections and which prompted another promise by the incumbent government to raise pension to Rs 9,000 in 2020 and to Rs 13,500 by 2024. In December 2019, the BRP was raised to Rs 9,000. Thus, within five years pensions more than doubled. It is worth noting that earlier it took 10 years for the BRP to double between 2000 and 2010.

The government kept its promise and raised the pension to Rs13,500 in 2024 coinciding with the election year. It went further in the2024/25 budget and announced a rate of Rs 15,000 as from January 2025. The end result is that the BRP quadrupled between 2014 and 2025 with all its negative ramifications for the budget deficit and debt situation. The sharp increase that replaced the smooth curve prior to 2014 is evident from Figure 1.

🔹 Determining parameters

There is no doubt that the real value of pensions has increased in the long term with the BRP increasing many times more than the inflation rate. This leads to an improvement in the purchasing power of pensioners. It is normal for pensioners to be entitled to an increase in the cost of living just like workers. Even a higher adjustment may be justified given the increasing needs of the elderly. It is also fair to reward people who have worked hard and contributed to the economic progress of the country. Any government would like to do more as it increases their popularity. But this should not be overdone. They have to face the eternal economic problem of limited means and unlimited wants. However, the magnitude of pension increases defies economic logic with no relationship to any objective criteria. It is just like the magician who pulls a rabbit out of his hat.

The increase in pensions was populist and demagogic and not related to any objective yardstick. Economic measures cannot be taken in isolation. They have to be justified with cogent arguments and supported by facts. In this respect, an analysis of trends in certain parameters should form the basis of informed decisions. We compare the increase in pensions compared to trends in some relevant parameters like CPI, average earnings, per capita income, GDP at market prices, economic growth for the period 2014 and 2025. The statistics are revealing as shown in Figure 2. All these parameters convey the same message. There is a yawning gap between the BRP and all the indicators. The increase in BRP is largely well above the trends in all these indicators. The BRP increased by 314% between 2014 and 2025 while the inflation was only 50% or what is worse when the economy grew by a mere 29%. It bore no relationship with increase in CPI or average earnings or economic growth or even GDP at market prices or per capita income.

We make a simulation on the assumption that as from 2019 pensioners only received annual increases by way of compensation for the rise in inflation just like workers receive the pay compensation. On this basis, the BRP would have attained Rs 10,495 instead of the current rate of Rs 15,000 as shown in Figure 1. It would have restored the smooth curve except for a jump in 2014. The divergence from this curve and the actual BRP indicates the cost impact of the pension increase. The cost amounts to about Rs 15B in 2025 enough to mop up the entire recurrent budget deficit for 2025/26. In other words, this would have led to a substantial saving of that amount annually thereby having a positive impact on our budget deficit. Moreover, since it is a recurrent expenditure, the benefit would have accrued over the years.

🔹 Conclusion

The blind pursuit of populism has led us in troubled waters. Many professionals and institutions had sounded the alarm bell to which government turned a blind eye. In Economics there is a price to pay for profligacy just like in the grasshopper and ant story. Sooner or later the cost was bound to become unbearable putting in jeopardy the entire support system. The new government had to resort to drastic surgery which is bound to be unpopular. Ultimately, the pensioners themselves will be the losers.