State governments adopting the so-called old pension scheme may end up curbing current expenditure as they build up liabilities for the future, according to Raghuram Rajan, the former governor of the Reserve Bank of India.
“I think the reason we moved to the new pension scheme was because in the old pension scheme there were huge liabilities that built up. It is important to remember that defined benefit schemes typically are easier for government to take on because you are not recognizing the liabilities,” Rajan told Moneycontrol in an interview at Davos 2023.
Also Read: Himachal Pradesh govt approves restoration of old pension scheme
“And that implies that what you have really built up is a government liability for the future. And if you are prudent, that inhibits your spending today.”
Rajan’s comments come in the backdrop of a few state governments in India moving back to the old pension scheme for their employees.
Under the old pension scheme, government employees used to get a guaranteed pension. In the national pension scheme, contributions are funneled into securities and there is no guaranteed return.
This move is likely to hurt states’ finances, which are already under stress since the pandemic.
Also Read: SC permits pension contributions on higher salary. What’s in store for employers and employees?
Meanwhile, the central government has no proposal under consideration for restoration of the old pension scheme, the Union Government said on December 12.
The state governments of Rajasthan, Chhattisgarh, and Jharkhand have informed the Union about their decision to restart old pension scheme for their employees. Punjab has issued notification regarding implementation of the OPS and the Himachal Pradesh cabinet has also approved the shift back to the old pension regime.
Former RBI Governor Rajan said it is for each government to decide on spending choices but said that the schemes should be targeted as effectively as possible towards the weaker segments of society.
“Transfers will happen but if you don’t want to compromise your ability to spend in the future, target it at people who absolutely need it,” Raghuram Rajan told Moneycontrol.
Montek Singh Ahluwalia, the former deputy chairman of the erstwhile planning commission told Moneycontrol in December that the reversal to the old pension scheme is a bad idea.
“And I feel that if this is seen to be the way to go, every state may end up doing it. And somebody fiscally should be asked to project what does this mean 10 years down the road?” Ahluwalia had said.
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