Which states bear the highest burden of pension?

A Moneycontrol analysis shows that of the country's 18 large states, which account for over 90 percent of India's GDP, six spent over a third of their revenue on pensions, while another three spent between 25 percent and 33 percent.

Only two—Maharashtra and Telangana—spent around 15 percent of their own tax revenue on pensions.

If states do opt for the Unified Pension Scheme (UPS) announced by the Union government on August 24, there is likely to be an additional burden. That's because the latest proposed scheme guarantees 50 percent of the average basic pay of the last 12 months as pension to employees and increases the government contribution to the pension fund corpus to 18.5 percent.

Most states currently contribute 14 percent of employee salary (basic + dearness allowance) to the pension fund at present, and an increase to 18.5 percent would mean states spending 32 percent more on pensions starting next year.

Take the case of Uttar Pradesh. A Comptroller and Auditor General of India report shows that in FY23, Rs 6,744 crore was the contribution of the government to the pension corpus. The total expenditure of the state on pensions—this includes payments to employees under the old pension scheme as well—was Rs 58,697 crore.

An 18.5 percent payment to corpus instead of 14 percent, will likely add around Rs 3,000 crore to UP’s pension bill. This is over and above the 10 percent increase in the pension bill that the states witness each year.

Bihar’s situation is much worse. For one, the growth in pension spending of the state has far exceeded that of other states in recent times.

A CAG report on Bihar shows that while the general category states witnessed an 11.4 percent increase in their pension bill between FY22 and FY23, the pension bill for Bihar rose 14.1 percent during this period.

As per a Moneycontrol analysis of state budgets, the pension bill of Uttar Pradesh and Bihar jumped over 20 percent between FY24 and FY23 as well.

OPS vs UPS

Some states had already announced a shift to the old pension scheme or OPS, which does not require any contribution from employer or the employee and guarantees 50 percent of basic pay as pension. The switch to UPS will still be more beneficial to these states even if painful in the short term.

While the states are likely to witness an increase in their pension bill, as the contribution quotient increases to 18.5 percent instead of 14 percent, the UPS does guarantee returns, so the states will only have to bridge the gap between the return on corpus and the 50 percent guaranteed pension.

A Moneycontrol analysis shows that if the corpus yields a return 11.5 percent each year, the government will have no liability in guaranteeing the 50 percent pension.

However, if the return falls to 8.25 percent, states will have to meet the 34 percent difference between the guaranteed pension and actual pension received via UPS.

It would still be more beneficial, though, than taking on the entire pension liability as is done in the case of OPS.

The benefits would start showing from 2060 onwards as this is when the government would have made the last of its payments under OPS and a majority of employees would be under the new UPS system.

“Internal estimates suggest that if all the State governments revert to OPS from the NPS, the cumulative fiscal burden could be as high as 4.5 times that of NPS, with the additional burden reaching 0.9 per cent of GDP annually by 2060. This will add to the pension burden of older OPS retirees whose last batch is expected to retire by early 2040s and, therefore, draw pension under the OPS till the 2060s,” the Reserve Bank of India had said in its State Finances study published in December 2023.

Prior to the UPS announcement, Karnataka, Punjab, Rajasthan, Himachal Pradesh and Chhattisgarh had announced a move back to OPS.