OPS adoption may benefit current generation at cost of future generations

Several states, including Himachal Pradesh, which held elections recently, have announced their decision to bring back the old pension scheme (OPS). 

Pension reforms were implemented about two decades ago to reduce the burden on the finances of central and state governments. By reverting to OPS, states may reduce their pension expenditure in the near term, but will incur higher pension expenditure in the longer run.

In 2000, the Project Old Age Social and Income Security report observed that higher government spending on old age security had often been at the cost of spending on other important public goods.

The Report of the Group to Study the Pension Liabilities of State Governments (2003) noted that the continuation of the existing pension (defined benefit) scheme without any modification would be unsustainable and deteriorate states’ financial position.

Pension payments as a percentage of revenue receipts of states increased from 2 per cent in 1980-81 to 11 per cent in 1999-2000.

The architecture of government pensions in India changed with the implementation of the National Pension System (NPS). This scheme was made mandatory for all central government employees (except the Armed Forces) joining from January 1, 2004.

NPS changed the principle of pensions from a defined benefit scheme to a defined contribution scheme. 

Under NPS, employees contribute a certain amount from their monthly emoluments (usually 10 per cent) in a pension corpus. A contribution is also deposited by the government in the corpus.

Given that the current retirees from state governments are primarily the beneficiaries of OPS, the immediate financial strain will not be felt if states choose to implement it.

However, when employees who joined after the implementation of NPS begin to retire from 2034 onwards, the costs of reverting to OPS will become more visible. 

Adoption of OPS is expected to benefit the current generation at the cost of future generations.