Himachal Pradesh CM reinstates Old Pension Scheme: Why this is a bad idea

This move has triggered a political slugfest between Congress and the BJP, the principal opposition in the state. “In reality, the Congress government has no plan. There are already doubts over its functioning. They have gained power by lying and will keep the public in the dark,” alleged Himachal BJP spokesperson Karan Nanda.

However, apart from the BJP, non-partisan economists and experts have also expressed their concerns with the OPS. The Indian Express explains.

The Old Pension Scheme, providing assured returns

The attraction of the Old Pension Scheme lay in its promise of an assured or ‘defined’ benefit to the retiree – giving it its other name, ‘Defined Benefit Scheme’. Under this scheme, the pension was fixed at 50 per cent of one’s last drawn basic pay. This means that if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, they would be assured of a pension of Rs 5,000, in addition to the dearness allowance.

DA — calculated as a percentage of the basic salary — is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living. DA hikes are announced twice a year, generally in January and July. A 4 per cent DA hike would mean that a retiree with a pension of Rs 5,000 a month would see her monthly income rise to Rs 5,200 a month.

Concerns with the OPS

The main problem with the scheme was that the pension liability remained unfunded — that is, there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.

This made the OPS unsustainable. For one, pension liabilities would keep climbing since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation. And two, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.

The New Pension Scheme

The New Pension System, originally conceived for unorganised sector workers, was adopted by the government for its own employees starting from January 1, 2004.

Under this scheme, the defined contribution comprised 10 per cent of the basic salary (a reduction from the erstwhile 50 per cent) and dearness allowance by the employee with a matching contribution from the government. In January 2019, the government increased its contribution to 14 per cent of the basic salary and dearness allowance.

Individuals can choose from a range of schemes and pension fund managers ranging from public sector banks and financial institutions to private companies. The risk profiles of various schemes offered by these players vary from ‘low’ to ‘very high’. The 10-year return for the NPS Scheme-Central Government floated by SBI, LIC, and UTI stood at 9.22 per cent; the 5-year return at 7.99 per cent, and the 1-year return at 2.34 per cent. Returns on high-risk schemes could be as high as 15 per cent.

The reason behind the reintroduction of OPS in Himachal

Simply speaking, the OPS provides far higher assured returns. While the NPS invested in the right schemes can be as lucrative, it still does not guarantee the amount that the OPS does. As poll promises go, guaranteeing voters more income has always been popular. Both Congress and AAP had included shifting to the OPS as a poll promise during the 2022 Himachal Pradesh election campaign.

However, the challenge now will lie in implementing this scheme. “Affordability of OPS expenditure will be achieved through financial discipline and cutting down on expenses, and the government believes that there is no such thing that cannot be done,” said CM Sukhu.

Why is the OPS both bad economics and bad politics?

Over the last three decades, pension liabilities for the Centre and states have jumped manifold. Overall, pension payments by states eat away a quarter of their own tax revenues. For some states, it is much higher. For Himachal, it is almost 80 per cent (pensions as a percentage of the state’s own tax revenues).

If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts. Funding a small number of former government employees by utilising a chunk of taxpayers’ money cannot be good politics. There is also the larger issue of inter-generational equity. Today’s taxpayers are paying for the ever-increasing pensions of retirees.

Himachal’s move to the OPS will bring the state government some short-term gains: they save money since they will not have to put the 10 per cent matching contribution towards employee pension funds. For employees too, it will result in higher take-home salaries, since they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.

But while Congress has caved in to employee demands — even if they account for a small percentage of the country’s workforce and are better taken care of than many others — the remedy is worse than the problem faced by some government employees, who are concerned their pension may not be the same as 50 per cent of their last salary drawn (as in the OPS).