Pension Bill stuck, heavy price paid by Bengal and Maharashtra

Analysis by The Indian Express and Invest India Economic Foundation (IIEF) shows that the pension liability on account of existing workers o...

Analysis by The Indian Express and Invest India Economic Foundation (IIEF) shows that the pension liability on account of existing workers of eight major states adds up to Rs 8.5 lakh crore. The biggest two of these, Maharashtra and West Bengal, have made little progress on adoption of the New Pension System.

A recent study by Gautam Bhardwaj of IIEF and S A Dave of CMIE has estimated that India’s implicit pension debt (IPD) on account of current civil employees of the Centre and states is Rs 17.35 lakh crore.

The other states with a large IPD are Andhra Pradesh (Rs. 1.04 trillion), Gujarat (Rs. 0.96 trillion), Uttar Pradesh (Rs 0.92 trillion), Tamil Nadu (Rs. 0.73 trillion), Rajasthan (Rs 0.72 trillion) and Kerala (Rs 0.54 trillion).

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Put together, these 8 problem states account for around Rs.8.5 trillion crore, or 60% of India’s civil service pension problem in the state government sector is in these 8 states.

Pension promises of the government are similar to government bonds in that they are promises by the government to pay money in the future. The amount that is committed is not explicitly visible, as the stock of government bonds are.

It has to be calculated based on the number of employees, their age profiles, their incomes and pension promises.

The implicit pension debt has not been estimated for state governments until now because of the lack of data. The current calculations have been made possible by the Indian Retirement Earnings and Savings (IRES) survey.

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The analysis shows that Maharashtra and Goa jointly have an implied pension debt of Rs 2.13 lakh crore. This is followed by West Bengal at Rs 1.38 lakh crore. Thus Maharashtra, Goa and West Bengal are leaders in the pack in terms of problems on account of civil service pensions.

The pension liability of these states alone is roughly as big as that of the central government, excluding defence. But none of these states—who need pension reforms the most—have adopted the New Pension System (NPS).

Under this new scheme, announced by the Centre, all new employees joining after January 1, 2004 will contribute 10% of their salary and DA.

The government’s liability will be limited to a matching contribution deposited into the employee’s personal account.

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But the future of the NPS is in suspense, with the inability of the UPA government to carry the pensions legislation through Parliament.

In the old pension scheme, government employees get a given pension when they retire and the entire payment is made out of the taxes.The pension bill of state governments combined rose from Rs 3,592 crore in 1990-91 to Rs 30,396 crore in 2002-03.

This sharp increase in pension expenditure has led to a slow down in recruitment as states tried to bring down their pension liabilities.

Madhya Pradesh, Gujarat, Andhra Pradesh, Chattisgarh, Jharkhand, Manipur, Rajasthan, Himachal Pradesh, Tamil Nadu and Uttar Pradesh have notified the decision to join the new pension system.

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Assam, Orissa and Punjab have made budget announcements. Others are on their way, except for West Bengal, which has explicitly decided not to join. Kerala has not rejected the NPS, but has yet to announce it.

If the NPS is not implemented, the pension burden of the government will continue to grow. And there is no solution in sight—with Parliamentary Affairs Minister Ghulam Nabi Azad saying that the Pensions Fund Regulatory and Development Authority (PFRDA) Bill is not likely to be tabled in Parliament this session.