Rajasthan’s move to reintroduce oldpension regime is politically motivated
The Rajasthan government has decided to move back to the scheme for its employees. It has made a budget proposal for the same. The government employees (Central as well as states) were previously enjoying the benefit of defined pension. But the government sought to reform following much deliberations and efforts by unveiling a new pension scheme in 2004, which became applicable to employees who joined services from 1st January 2004.
The old pension scheme was linked to the last pay drawn by the employee, while also guaranteed with Dearness Allowance revision, ensuring the benefit of 50 per cent of last pay drawn as basic pension. In the new pension scheme, employees' contribution of 10 percent of pay plus employers' contribution of 14 percent of pay will be invested and pension would be incumbent upon the corpus. Thus, there is no assured pension based on the last drawn pay.The new pension scheme has limited the government's commitment to the extent of monthly contribution of 16 per cent.
For the past many years, government employees (Central as well States) are demanding continuation of the old pension scheme. Now if the Rajasthan government concedes to the demand, it will be difficult for other state governments to refuse such a demand. The Central government will also be forced to concede for such a demand when more state governments go back to defined pension schemes.
There is a difference between pension schemes of the Central and State governments and other public sector enterprises like the public sector banks. Governments do not have any pension corpus fund maintained separately, and liabilities are met from the revenue as part of the revenue expenditure. Public sector banks have a dedicated pension fund which is accumulated from monthly contributions by banks and based on the actuarial valuation any shortfall is also made good out of by the yearly profit of the banks. Hence, the fund created is out of profit generated by the banks and it is part of the staff cost. The pension fund is used to pay pension and family pension every month.
As the government does not have any such funding, it necessarily has to pay pension out of taxpayers' money every year and consequently the government may have to collect more tax from the general public to meet the additional demand.
According to the 2018-19 Annual Report on Pay and Allowances of Central Government Civilian employees, compiled by the Department of Expenditure under Ministry of Finance, the total outgo on salaries and pension of central government employees in that year was Rs 2.08 lakh crore. This was more than seven per cent of the previous year's figures.
In this connection, the Department of Information and Public Relations Government of Rajasthan has issued a full page advertisement in all leading newspapers on 26th April. The advertisement claims that the implementation of the old pension scheme will not result in deduction of even a single rupee from development expenditure of the state and welfare of its people. What does it mean? When the state expenditure is going to increase on account of reverting back to the old pension scheme, if it has to continue all the welfare schemes and infra funding, then it means, it has to find ways and means either to tax more or to borrow more.
The cumulative spending by states on pensions was over Rs 4 lakh crore in FY 2022 and the governments may not be able to sustain the defined pension without passing on the burden to the citizens. The move is aimed at electoral gains, which is essentially bad economics.
(The writer is a retired banker. The views expressed are personal.)