RBI Bulletin: Shift to OPS by states would be ‘fiscally unsustainable’, big step back

Several states government have informed the Centre about their decision to restart the Old Pension Scheme for their employees

A shift by state governments to the Old Pension Scheme (OPS) will be "fiscally unsustainable" and a "major step backwards", the Reserve Bank of India (RBI) said in its monthly bulletin.

"…short-run reduction in states' pension outgo, which may be driving decisions to restore OPS, would be eclipsed by the huge rise in future unfunded pension liabilities in the long run. States' reverting to the OPS would be a major step backwards and can increase their fiscal stress to unsustainable levels in the medium to long-term," the article, released on September 18, said.

Titled 'Fiscal Cost of Reverting to the Old Pension Scheme by the Indian States – An Assessment', the article has been authored by RBI staff from the economic and policy research and monetary policy departments. The views expressed in the article do not reflect the central bank's official stance.

The assertion by the central bank's staff comes amid a growing number of states announcing a move to the OPS, which has taken a central role in state politics with the refusal of the erstwhile BJP government in Himachal Pradesh to bring back the scheme widely seen as one of the reasons behind its loss in the state elections held in late 2022. Such has been the Centre's concerns around states transitioning to the old scheme that it constituted a panel, led by Finance Secretary TV Somanathan, to review the issues plaguing government employees' pensions.

While the OPS guarantees a fixed pension of 50 percent of a government employee's last drawn salary without any contribution during their working life, the National Pension System (NPS) requires employees to contribute 10 percent of their basic salary and the government 14 percent, with the eventual pension contingent on market returns on the corpus.

According to a report by news agency Reuters in June, the Somanathan-led committee was said to strike a middle ground by recommending an assured pension of 40-45 percent of the last salary. However, the finance ministry swifty denied the report, saying the committee had not reached a conclusion and was still talking to stakeholders.

Long-term costs

According to the RBI Bulletin article published on September 18, while states' decision to move to the OPS would see reduced pension outgo in the short term, the reduction would be more than cancelled out by a "huge rise in future unfunded pension liabilities in the long-run" and can increase their fiscal stress to "unsustainable levels".

Source: Reserve Bank of India

Over the last three decades, states' spending on pensions has increased at a faster rate than the growth in their revenue receipts, the article said.

"The ratio of present value of total OPS burden to the present value of total NPS burden reveals that the overall pension burden of the States over the period end-March 2023 to end-March 2084 will increase on an average by around 4.5 times if they choose to shift from NPS to OPS," it added.