The demand for returning to the old pension scheme is gaining traction. Several states such as Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal have already announced a shift back to the OPS. In April, the Union finance ministry had formed a committee headed by Finance Secretary TV Somanathan to look into the issue of pensions. The committee will consider if any changes are needed to the NPS framework to improve pensionary benefits while ensuring fiscal prudence. Now, as per a report in this paper, a new proposal has been put forth by some states.
Under this proposal, states have sought an assured pension that is linked to the minimum level of pay, not the last drawn salary, as it stood under the old pension scheme. So while this does involve a lower pension, it is assured. In comparison, under OPS, a defined benefit scheme, government employees would receive 50 per cent of their last drawn salary as pension, while under the NPS, contributions are defined, not benefits. Another model, earlier reported on in this paper, talked about combining elements of the old pension scheme and the new pension scheme — under this framework, there was both a “defined contribution” by employees, and “defined benefits”. Considering the electoral cycle, there is a possibility of some sort of adjustment being made which defines the contributions of employees, and also their benefits. After all, political considerations could well overpower economic logic. However, any such structure which seeks to provide assured returns, even if they are lower than those under the OPS, could be moving backwards. The burden of fulfilling any “defined benefit” will fall on governments.
The difference between OPS and NPS is stark. According to a recent study by the RBI, the burden of switching back would be roughly 4.5 times that of the NPS, “with the additional burden reaching 0.9 per cent of GDP annually by 2060”. Allocations towards pensions already account for a significant share of both central and state government expenditure. As of March 2023, NPS had 23.8 lakh central government subscribers, and 60.7 lakh state government subscribers. A return to defined benefits, in whatever form, could thus have adverse fiscal implications for governments. It would leave less space for more productive forms of spending. Governments must resist the temptation of short-term fiscal and political gains, and take into consideration the long-term implications of their policies.
