RBI Warns Against Implementation Of Old Pension Scheme

The Reserve Bank of India (RBI) has warned that implementing the old pension scheme (OPS) would add to the financial burden of states as non-BJP ruled states like Chhattisgarh, Rajasthan, Himachal Pradesh, Jharkhand and Punjab begin reimplementing the scheme. 

In a report titled "State Finances: A Study of Budgets of 2022-23," the central bank stated that the move would be a major risk to the "subnational fiscal horizon" and may potentially lead to the accumulation of unfunded liabilities in years to come. 

According to the RBI report, the potential return to the old pension scheme by certain states is a significant threat to their financial situation, and any savings in fiscal resources resulting from this decision will not last long. 

The governments of Chhattisgarh, Rajasthan, Himachal Pradesh, Jharkhand, and Punjab have already informed the Centre about their decision to implement the old pension scheme, which they all had promised to do in their election manifestos. 

The decision to implement the scheme has led to a political scrap between BJP and non-BJP ruled states. 

It was the BJP-led NDA government which repealed the old pension scheme from 1 April 2004 onwards. The government replaced the OPS with the National Pension Scheme (NPS), where government employees contribute 10 per cent of their basic salary towards their pension while the government contributes 14 per cent. The unique aspect of the NPS system was that the private sector was also included under it. 

Under the OPS system, retired government employees would receive 50 per cent of their last drawn salary as their monthly pension, and as the dearness allowance (DA) rates saw hikes, retired employees’ monthly pension would also increase. 

Given the non-contributory nature of the OPS, it is not fiscally sustainable, and thus, the burden on the exchequer keeps on mounting, according to experts. 

Former RBI governor D Subbarao has also commented on the negative effects of the old pension scheme, saying "In a country where the large majority of the people have no social safety net, government servants with an assured pension are a privileged lot. Privileging them even further at the cost of the larger public will be morally wrong and fiscally detrimental.” 

Subbarao further warned that if state governments decide to go back to the old pension scheme, the burden will fall on current revenues, which means having to sacrifice schools, hospitals, roads, and irrigation.