Opinion On Andhra Pradesh pension scheme: An imprudent proposal

Until now, it was only Congress and Aam Aadmi Party governments in states such as Rajasthan, Chhattisgarh and Punjab that had taken steps to return to the old pension scheme. A few weeks ago, even the BJP-Sena (Shinde) government in Maharashtra indicated that it was not averse to rethinking its position. So far, the central government has been steadfast in its opposition to reverting to the old pension scheme. However, with calls for shifting back to the old architecture gaining traction, and arguably considering the electorate cycle, there is reportedly some discussion on a new pension framework, combining elements of the new and old pension schemes. Reverting to any version of the “defined benefit” system risks undoing the hard-won policy gains achieved through multi-party consensus. Doing so will have adverse implications for government finances.

As reported in this paper, finance ministry officials are discussing a new model that has been proposed by YS Jagan Mohan Reddy in Andhra Pradesh. The proposal seeks to ostensibly combine the benefits of the old pension scheme and the new pension scheme. In doing so, it seeks a “defined contribution” from employees and offers “defined benefit” through two options. Under the first option, if employees contribute 10 per cent of their basic salary every month, which is matched by an equal contribution by the government, then employees will get a guaranteed pension equivalent to 33 per cent of their last drawn salary. If contributions of both are stepped up to 14 per cent, then the guaranteed pension will rise to 40 per cent. However, whichever structure is ultimately adopted, the burden of fulfilling the obligation of “defined benefit” will fall on the government.

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Proposals such as these, given their long-term fiscal implications,will only increase government’s liabilities and restrict the space available to spend on more productive forms of expenditure. States have already allocated Rs 3.86 lakh crore in 2020-21 towards their pension liabilities. Andhra Pradesh has a high debt burden. The state has contingent liabilities in excess of 5 per cent of GSDP. And in 2022-23, it has announced freebies worth 2.1 per cent of its GSDP (gross state domestic product) as per an RBI report. Thus, while such moves may appear politically convenient, and perhaps provide short-term gains, they are fiscally imprudent and will have long-term implications for state finances. Governments must not succumb to such populist measures.