How the power of compounding gave birth to the National Pension System

Last Updated on

My mother retired 13 years ago and started receiving a pension that was indexed to inflation. Not only did it increase twice a year, thanks to DA hikes, it also increased as a result of pay commissions. The average year on year growth of her pension is close to 13%. This is an astounding number – not for her, but for the government who has to pay a similar pension to the lakhs of central and state government pensioners.

Paying a pension that tries to keep pace with inflation, or an indexed pension is a debt trap for the government. The projected strain on our fiscal deficit was alarming. Hence the government decided to stop defined-benefit pension schemes that offered indexed pension and moved over to a defined-contribution pension – the national pension system (NPS), also known as the new pension scheme.

In a way, a retiree receiving an indexed pension is a government employee for life. The NPS seeks to severe ties with the employee post-retirement.

Why was the National Pension System Introduced?

Here are some facts that gave birth to the NPS.

In 1998, the Committee for Old Age Social and Income Security (OASIS) was set up. It noted that the population of the 60+ age group is expected to increase by ~ 107% between 1991 and 2016.  Senior citizens represent 9-10% of our population today and this is expected to grow to13.3% by 2026.

The life expectancy after normal retirement at 60 is expected to be at least 15-20 years.

As per 1991 census data, only 11% of the total workforce is eligible for subscribing to a pension scheme!  The fear that most of them would not have retirement savings to speak of is the main reason for the introduction of the NPS Swavalamban Yojana for the unorganised sector.

Even if one assumed no increase in government employment after 1992 (true in many areas) the pension expenditure for the central government will increase from Rs. 35,690 million in 1995 to  Rs. 2,71,830 million in 2015. A CAGR of ~ 17.5%!

Pic Credit:
Pic Credit: Josh Adams

The 7th Pay Commission report notes that

the total pension liability on account of Central Government employees had risen from 0.6 percent of GDP (at constant prices) in 1993-94 to 1.66 percent of GDP (at constant prices) in 2002-03. Pension expenditure of the Central Government grew at a compound annual growth rate (CAGR) of 21 percent during the period 1990 to 2001

The tax burden on the state government is also similar as noted here.

A CRISIL report notes that pension burden for the government is expected to remain close to 2.2% of the GDP between 2015 and 2030 and only then decrease to about 0.7% ~ 2050.

These are the manifestation of the negative power of compounding in the number of 60+citizens, life expectancy due to increase in technology and health consciousness and of course in the burden to the government that has to pay an indexed pension.

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

1 Comment

  1. Awesome ….
    These fools appoint crooks & cheaters who get huge cashpots & they rob us cozz their need can be satisfied with the cashpots but not greed.

    Recently had conversation with a son of Police Inspector he was crying that his father doesn;t get enough so aajkal side income chahiye (read checknaka returns side income) . Now why they need more money TWO SON & ONE daughter. Both Oxx want Iphone bike, daughter wants scooty iphone , beautyparlour costly pubs bar. Strange Smartphone can also fulfilll the same needs that a Iphone can do but what to do Trend & Fashion sometimes can make one do anything.

Leave a Reply

Your email address will not be published. Required fields are marked *