The new pension scheme or NPS has addressed the inequity issue by providing a platform to the private sector

Even as the finances of states were beginning to look better as reflected in decline in the ratio of state government debt to GDP from 31.2 per cent during 2021-22 to 29.5 per cent during 2022-23—as per the budgetary estimate (BE) —the political brass in different states have made populist announcements which don’t augur well for the future. One of these relates to the revival of the old pension scheme (OPS).

Making a statement in the Lok Sabha, the Minister of State for Finance Bhagwat Kishanrao Karad said, “The state governments of Rajasthan, Chhattisgarh, and Jharkhand have informed the Central government about their decisions to restart OPS for their respective employees.”

The Congress government in Himachal Pradesh has also announced restoration of OPS. In view of impending elections in nine state assemblies during 2023 and almost all non-BJP parties more than willing to please voters, more and more states are expected to join the bandwagon. As for the central government employees, although for now, Karad informed Parliament that the Centre has no proposal to resurrect the OPS.

At the outset, let us understand pension. A pension provides a person with monthly income when he is old and hence not productive enough to be able to earn. The increase in life expectancy and rise in the cost of living further reinforces the need for assured monthly income for a decent and dignified life in old age.

Under the OPS, retired employees received 50 per cent of their last drawn salary as monthly pension. As on date, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500 (50 per cent of the highest pay in the Central government, which is Rs 125,000 a month).

Just as the government offers its employees an adjustment in dearness allowance or DA - calculated as a percentage of the basic salary – to offset increase in the cost of living, the monthly payouts of pensioners also increases. Since, the DA hikes are announced twice a year, generally in January and July, a retiree also gets hikes in pension. For instance, with a 4 per cent increase in DA, a pensioner eligible for Rs 62,500 would get a monthly pension of Rs 65,000.

A government employee under OPS could not have gotten anything better. He was entitled to a decent ‘pre-determined’ monthly amount; the pension was fully protected against inflation and got it as long as he lived. After death, his wife gets the same amount for seven years and thereafter the family pension being around 60 per cent of this till she is alive.

However, from the perspective of the government, the arrangement could not have been worse. Given the architecture of the scheme, there was an inherent tendency of pension liabilities to balloon due to addition to the pensioners’ club every year, higher salaries of those joining, inflation indexation, increased longevity and so on. The proof of pudding is in the eating.

In 1990-91, the Centre’s pension bill was Rs 3,272 crore. By 2020-21, it had jumped 58 times to Rs 190,886 crore. The outgo for all states put together shot up 125 times from Rs 3,131 crore in 1990-91 to Rs 386,001 crore in 2020-21. Overall, pension payments by states accounted for a quarter of their own tax revenues.

For some states, pension payments took away a much higher share of their own tax revenue. For Himachal Pradesh, it was 80 per cent whereas for Punjab and Rajasthan, it was 35 per cent and 30 per cent respectively.

After payment of wages and salaries to the serving employees and other routine expenses, hardly any money was left with these states for meeting development and welfare expenses.

Prudent financial management required that every year, the government set aside capital which together with return accruing thereon would create a growing corpus sufficient to pay for the pension liabilities. This would have provided for a sustainable basis for discharging these liabilities without causing any stress on the budget. In short, there was a need for funding the pension liability. That was never done.

Instead, both the Centre and states have followed ‘pay-as-you-go’ impacting their budgets in a totally uncontrolled manner, besides making the present generation of taxpayers to bear the continuously rising burden of pensioners. Moreover, given the persistent shortfall in tax revenue, they were forced to borrow more and more thereby passing on the burden to future generations of taxpayers as well.

According to an expert committee (2000) under S A Dave, a former chairman of SEBI, on Old Age Social and Income Security (OASIS), just 3.4 crore people, or less than 11 per cent of the estimated total working population of 31.4 crore (as per 1991 census), had some post-retirement income security such as government pension, Employees’ Provident Fund (EPF), or the Employee Pension Scheme (EPS).

The rest of the workforce had no means of post-retirement economic security. In this backdrop, using a disproportionate share of state resources for benefiting a tiny section of the working population was iniquitous and unconscionable.

To address the above concerns, a new pension scheme (NPS) was introduced for government employees joining service from January 1, 2004. NPS is a contributory pension scheme under which employees contribute 10 per cent of their salary (Basic + Dearness Allowance). The government contributes 14 per cent towards the employees’ NPS accounts.

NPS is free from all the maladies afflicting OPS. It offers a self-financing and fully funded arrangement for discharging pension liabilities in which the state knows for certain ‘how much it has to contribute’. There won’t be any major stress on the budget even as the employee gets a good pension depending on the amount of contribution made, the age of joining, type of investment, and the income accruing from that investment.

Under this scheme, the pensioner enjoys a lot of flexibility; he can increase the pension amount by asking his fund manager to invest in say a ‘growth fund’ wherein 50 per cent of the corpus can be put in equity which is capable of generating better returns than investment in corporate bonds or government securities.

The government has made NPS more attractive by offering fiscal incentives such as deduction up to 10 per cent of salary (basic+ DA) within overall ceiling of Rs.150,000/- u/s 80C in respect of employee contribution; deduction up to Rs.50,000 u/s 80 CCD(1B) for additional (albeit voluntary) contribution and deduction up to 10 per cent of salary u/s 80 CCD(2) towards employer contribution (this is over and above the limits u/s 80C).

The NPS has also addressed the inequity issue by providing a platform to the private sector, including the unorganised sector to secure pension post-retirement.

As on October 31, 2022, apart from around 8,200,000 subscribers in the government (states 5,900,000 and Centre 2,300,000), the corporate sector had about 1,600,000 subscribers, and the unorganised sector 2,550,000. In addition, there were around 4,200,000 subscribers under the NPS Swavalamban scheme—designed especially for the poor and the under-privileged citizens.

Having made good progress in providing a sustainable basis for financing pension liabilities under NPS, for states now to go back to OPS is a retrograde move. This must be avoided or else India could plunge into fiscal catastrophe, come 2034 when they will have to start paying pension to the first lot of those who came under NPS in 2004 and now being shifted to OPS.