Old Pension Scheme: A Cocktail Of Bad Economics And Vote Bank Politics

After major controversies and conversations, the Punjab cabinet on November 18 finally cleared the old pension scheme (OPS) for government employees. 

In May 2022, two Congress-ruled states – Rajasthan and Chhattisgarh implement the scheme and pledged to restore it in Gujarat and Himachal Pradesh if voted to power.

OPS has become a major political issue in several parts of the country. However, various experts have raised alarm over short-term gains for states, as pension liabilities increase over time and the space for quality expenditure gets curtailed further.

The Central Government in budget announced the winding up of the pay-as-you-go PAYG pension for central government employees and migrate all new employees  to the then new pension scheme (NPS) which was a defined contribution scheme (DC).   For the states the participation in new pension scheme was on voluntary basis. However, many states beginning 1-Jan-2004 decided to join NPS on the template adopted by NPS. The only state that has so far not joined NPS is  
West Bengal and Tamil Nadu. 27 states have joined between 2003-05.

Comptroller and Auditor General of India Girish Chandra Murmu on the enactment of OPS by some states said, "The re-establishing of the scheme in some states is financially risky for the governments, the fiscal health of states was a subject that required careful assessment."

Murmu also expressed concern about the “low mobilisation” of state governments’ sources of tax and non-tax revenue.

In the old pension scheme, employees get 50 per cent of their last drawn basic pay plus dearness allowance on retirement.

In a report on the fiscal risks confronting state governments, the Reserve Bank of India's department of economic and policy research stated that pension expenditure alone accounts for 12.4 per cent (average of 2017-18 to 2021-22) of total revenue expenditure of the ten most indebted states (Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, UP and Haryana). 

The report also estimated that the pension outgo will continue to be in the range of 0.7-3.0 per cent of GSDP in these states until 2030-31.

The report further stated that as the current state government retirees are primarily the beneficiaries of the old pension scheme, the immediate financial strain will not be felt if the  states choose to revert to the old pension scheme. 

However, when state government employees who joined after 2004-05 under the NPS begin to retire  from 2034 onwards, the cost of such a move will  become apparent.