Political parties are advocating a return to the old pension scheme. Beginning with Congress in Rajasthan and Chhattisgarh, similar promises have been made by the Aam Aadmi Party in Punjab and now by both these parties in the ongoing election campaign in Gujarat. This is unfortunate. Such proposals, driven by short-term political considerations, benefit only a tiny sliver of the electorate. Championed without an understanding of their long-term implications, or driven by a will to ignore the enduring consequences, they threaten to undo the hard-won policy gains that have been achieved through bipartisan consensus. This will have disastrous implications for government finances.
The old pension scheme was based on the concept of “defined benefit”. Under it, the pension of government employees was fixed on the basis of the last drawn salary. However, funding this exorbitant entitlement over time would have been fiscally challenging — calculations of the implicit pension debt, based on the promises to government employees and others, painted a grim picture. Thus concerns over sustainability and scalability impelled the shift to the new pension scheme. The new pension scheme was based on the concept of “defined contribution”, fixing the contribution of both the government and the employee. Since its launch, the NPS has built a robust subscriber base. At the end of October 2022, the scheme had 23.3 lakh central government subscribers and 58.9 lakh state government subscribers. Then there are others, including 15.92 lakh subscribers from the corporate sector, and 25.45 lakh from the unorganised sector.
The pension reform process was initiated by the NDA government under Prime Minister Atal Bihari Vajpayee. After coming to power, the UPA government stayed the course. In March 2005, it introduced a Bill in the Lok Sabha to provide statutory backing to the Pension Fund Regulatory and Development Authority of India (PFRDA), which regulates the new pension scheme. But with Congress now reverting to the old framework, it would appear that the bipartisan consensus on the issue that allowed for pushing through much-needed hard policy measures has eroded. In the current environment, as parties in the Opposition space struggle to expand their reach, they may consider these moves as convenient. However, the fiscal implications will be grave. According to the RBI, states had allocated Rs 3.86 lakh crore in 2020-21 towards pension. This works out to around 26 per cent of their own tax revenue. For states like Bihar, Himachal Pradesh, Odisha, Uttarakhand, the share in the government’s own tax revenues is even higher. While there will be short-term gains for states, as pension liabilities increase over time, the space for more productive forms of expenditure will be curtailed. The burden of funding these pensions will fall on future generations. Rather than focusing on the immediate return and relief, political parties need to take a longer term view, and resist the temptation for such fiscally imprudent moves.
