The total pension costs for the 28 state governments are set to hit Rs 5.7 trillion in the fiscal year 2025, which is 1.7 per cent of the country's GDP.
This amount is more than double the Rs 2.4 trillion that the Government of India expects to spend on pensions, making up only 0.7 per cent of GDP.
This means that state governments will face a heavier burden in funding pensions compared to the central government.
Due to worries from some government workers about the New Pension Scheme (NPS) not being as reliable as the Old Pension Scheme (OPS), four states have switched back to the OPS in recent years.
In 2023, Andhra Pradesh introduced a new hybrid pension model that includes employee contributions. This model guarantees a pension amount based on a formula, similar to the OPS, and allows pensions to exceed the guaranteed amount, which benefits retirees while keeping the state's financial responsibility limited.
Additionally, the Cabinet has approved a Unified Pension Scheme (UPS) that combines features from both the OPS and the NPS, although many details are still pending. From a financial viewpoint, the NPS is seen as the most practical and sustainable pension system for state and union governments, as it limits their obligations to contributions made to a specific fund. However, employees seem to prefer the security offered by the UPS.
Once more details are available, it is expected that several of the 18 states currently using the NPS will consider switching to the UPS, excluding the six states that have already reverted or plan to revert to the OPS, including Andhra Pradesh and Maharashtra.
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