Modi Govt launches assured pension scheme for Central Govt Employees, amid concerns of financial implications

The Modi Government has announced the fixed pension scheme for the central government employees. This must be music to the ears of central employees who were not happy with the ongoing market-linked pension scheme and were demanding its scrapping, In a significant policy shift, the Indian government has approved a new pension scheme guaranteeing central government employees 50% of their base salary as a pension. This move marks a departure from the current National Pension Scheme (NPS), which links payouts to market returns. The newly introduced Unified Pension Scheme (UPS) is set to be implemented from April 1, 2025, and will impact over two million federal employees. The shift towards the UPS stems from growing dissatisfaction with the NPS, which was adopted in 2004 as part of a broader fiscal reform. Under the NPS, employees contribute 10% of their base salary, and the government adds 14%, with the eventual pension amount depending on the market returns from investments, primarily in federal debt. However, as some states began reverting to the older, more fiscally burdensome system of guaranteed pensions, the Modi government faced mounting pressure to reassess the NPS.

The decision to approve the UPS aligns with demands from trade unions and the Opposition parties, who have long advocated for a guaranteed minimum pension. The issue gained political traction during recent general elections, where the lack of pension security under the NPS became a contentious topic. The UPS guarantees that employees who have completed at least 25 years of service will receive 50% of their base salary, calculated over the last 12 months before retirement, as a pension. This assured payout provides a safety for retirees, addressing concerns about the volatility of market-linked pensions. While the UPS offers greater security for employees, it also imposes a significant financial burden on the government. The expected cost to the exchequer for the fiscal year 2024-25 is approximately Rs 62.5 billion. This annual expenditure is likely to fluctuate based on the number of employees retiring each year. However, the shift to the UPS raises several concerns. First, the financial sustainability of the scheme is a critical issue. The guaranteed nature of the pension could strain government finances, especially if economic growth slows or tax revenues decline. Additionally, the UPS may lead to disparities between central and state government employees. Moreover, there is a risk that the shift back to a defined benefit pension system could set a precedent for other sectors, potentially leading to broader demands for similar guarantees. This could exacerbate fiscal challenges, particularly in a country where social welfare spending is already under pressure. As India prepares to implement the UPS in 2025, careful management and ongoing evaluation will be essential to ensure that the benefits of the scheme are balanced against its fiscal impact.