Politics over pension

States cannot afford a return to the old system

Last week, Punjab joined Chhattisgarh, Rajasthan, and Jharkhand in jettisoning the National Pension System (NPS) and restoring the Old Pension Scheme (OPS). Tamil Nadu, Kerala, and Andhra Pradesh are reportedly considering similar moves. The Congress and Aam Aadmi Party, fighting Assembly elections in Gujarat and Himachal Pradesh, have promised to revert to the OPS if voted to power. As with the demand for One Rank One Pension (OROP) by retired service personnel, the return to the OPS is being driven by serial protests among government employees who prefer the visibility of a defined- or assured-benefit scheme such as the OPS over the relative opacity of the defined-contribution NPS.
 

As with OROP, a key election promise implemented within a year of the Bharatiya Janata Party coming to power in 2014, reverting to the OPS will be unsustainable for states in the long run. In fact, it was on this account alone that every state except West Bengal opted for the NPS and made it compulsory for employees who joined after April 1, 2004. Both schemes have tax benefits, but the OPS has inflation-linked dearness relief every six months. The key difference is that the government bears the entire cost of the OPS pay-outs whereas under the NPS employees contribute 10 per cent of salary and dearness allowance, with the government putting in 14 per cent. These funds are deposited in different schemes approved by the Pension Fund Regulatory and Development Authority (PFRDA) and invested in the equity and debt market, depending on the employee’s choice and subject to guidelines. The NPS, therefore, significantly reduces the financial burden on the states, the principal reason the United Progressive Alliance government felt compelled to endorse and propagate the law passed by the predecessor regime. 

Like giving freebies, the return to the OPS amounts to irresponsible populism at a time when most states’ revenues are under pressure. Heavily indebted Punjab is a good example. Its projected pension outlay for the current fiscal year is estimated at one-third the state’s own tax revenues. If the salaries and interest payments were added, the liabilities would exceed the state’s own tax revenue by almost 46 per cent. Even in Gujarat, which is in better financial shape than Punjab, the pension and salary costs would amount to 72 per cent of its tax revenues. The potential financial time bomb in Punjab’s finances may explain why the state has notified the switch to the OPS but has not specified a start date. It is possible that more states will soon start demanding a shift to the OPS, given the shrill and active campaigning by the National Movement for Old Pension Schemes, which has chapters in every state. All of this suggests that state governments and the PFRDA have done a poor job of explaining the NPS to employees.  Ultimately, it will be the narrow base of the Indian taxpayers who will have to bear the brunt of such populist profligacy.