Pension Politics: The old pension scheme threatens the new

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While the BJP made history in Gujarat by scripting a stupendous victory, government employees in the state continue to be unhappy with the party – a sentiment that the Congress and the Aam Aadmi Party (AAP) were hoping to capitalise on.

The state introduced the New Pension Scheme (NPS) for employees joining government service on or after April 1, 2005. According to a notification, the government would match the 10 percent of basic pay plus DA that employees contribute towards their pension. The employee’s contribution is mandatory.

But the move led to several protests in the state, which made the government increase its contribution to 14 percent in 2019 -the govt. increased its contribution 15 years after rolling out the policy.

The Congress and the AAP saw an opportunity and made reverting to the old pension scheme (OPS) part of their election manifesto. In fact, the demand for restoring the old pension scheme has become a major poll plank in states like Chhattisgarh, Punjab, Rajasthan, and Jharkhand.

New Pension Scheme

In the 2003-04 budget, the Vajpayee-led government announced a new pension scheme based on matching contributions by employees and the government. However, there will be no contribution from the government for individuals who are not government employees.

The fund is invested in equities and debt, and the returns are distributed among the pensioners. For instance, if on a salary of Rs 100, an employee contributes Rs 10, the government will also contribute Rs 10, totaling Rs 20. The money will be invested by fund managers, and the returns, if any, will be distributed.

The NPS is regulated under The Pension Fund Regulatory and Development Authority Act, of 2013. Under the scheme, every government employee is allotted a Permanent Retirement Account Number (PRAN).

At superannuation, the employee can withdraw up to 60 percent of the corpus and has to invest the remaining in an annuity scheme. The interest on the annuity is to be provided as a monthly pension to the employee.
The old pension scheme

Under the old pension scheme, the employee did not have to make any contribution, a budgetary allocation took care of pensions. In several states, the pension bill has surpassed the wage bill, a key reason to shift to the NPS.

The Congress, which won the Himachal polls, has promised to bring back the old pension scheme.

Can we afford the OPS?

According to an RBI Report — State Finances and Risk Analysis — pensions, interest payments, and administrative expenses comprise over 35 percent of the revenue expenditure of states like Haryana, Uttar Pradesh, West Bengal, Kerala, and Punjab. This means the proportion of development expenditure in these states is considerably lower than in others.

According to the report, pension expenditure alone accounts for 12.4 percent (average of 2017-18 to 2021-22) of the total revenue expenditure of the 10 most indebted states. It is estimated that pension outgo will continue to be in the range of 0.7-3.0 percent of the GSDP (gross domestic state product) of these states until 2030-31.

As the current state government retirees are primary beneficiaries of the old pension scheme, no major difference will be felt immediately if states choose to revert to the old pension scheme, stated the RBI in its June 2022 bulletin.

“However, when state government employees who joined after 2004-05 under the NPS begin to retire from 2034 onwards, the cost of such a move will become apparent. In other words, the adoption of the old pension scheme is likely to benefit the current generation at the expense of future generations,” the RBI noted.

“The burden of the pension will shift to governments that come after 2034. Future generations will have to pay for government employees. This is risky and irresponsible. It is unconscionable for any political party to make such offers. They are really hurting people,” said the former Niti Ayog Vice Chairman and Professor of Economics at Columbia University, Arvind Panagariya.