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.
