States switching to OPS incurring less proportion of earnings on pension

Contrary to popular perception, the states that have opted for the old pension system (OPS) are now incurring less proportion of their revenue receipts on the pension payout than they had spent when they were under the new pension system (NPS) for employees who have joined from January 1, 2004.

For instance, Chhatisgarh joined OPS from 2022-23. It is projected to spend 6.9 per cent of its revenue receipts on pension pay out (Revised Estimates) in that year against 9.4 per cent in 2021-22. This proportion is slightly projected to increase to 7 per cent for 2023-24 (Budget Estimates).

The state used to spend a proportion of its revenue receipts on pension expenditure in double digits in 2019-20 and 2020-21. The same trend could be seen in Jharkhand and Rajasthan.

Jharkhand restored OPS on September 1, 2022. It is projected to incur 8.8 per cent of its revenue receipts in OPS in 2022-23 (RE) against 10.9 per cent in the previous year. This proportion is projected to slightly increase to 8.9 per cent in the current financial year (BE). The state spent 12.10 per cent of its revenue receipts on pension payments in 2020-21 and 10.3 per cent inn 2019-20.

Similarly, Rajasthan implemented OPS from the beginning of 2022-23. That year it is projected to spend 11.9 per cent of its revenue receipts on OPS against 12.7 per cent in the previous year (RE). This proportion is further projected to come down to 11.1 per cent in 2023-24 (FY24). The state incurred 16.7 per cent of its revenue receipts on pension outgo in 2020-21 and 14.8 per cent in 2019-20.

Himachal Pradesh also followed this trend but its pension outgo as a proportion to revenue receipts remained high. The state introduced OPS in the current financial year. Though its proportion of pension outgo to revenue receipts is projected to come down to 22.8 per cent (BE) in FY24 from 23.2 per cent in 2022-23 (RE), the proportion is still quite elevated. It spent 17.1 per cent of revenue receipts on pension outgo in 2021-22, 18.2 per cent in 2020-21 and 17.8 per cent in 2019-20.

The high projected pension outgo as a proportion to revenue receipts may still be high in Himachal for the current financial year due to arrears from the past.

In his budget speech, Chief Minister Sukhvinder Singh Sukhu said his government has inherited huge debt and liability of about Rs 10,000 crore on account of arrears of salaries of employees and pensioners and dearness allowance from the previous regime.

The less outgo on pension as a proportion to revenue receipts in these states after they opted for OPS happens because these governments have not been giving their contribution to NPS since they switched over to the previous pension regime. Besides, the pension burden of the employees joining from January 1, 2004 has yet not materialised. NPS started for government employees from January 1, 2004 in the union government and most states.

Sources in the union finance ministry say that the pension burden would increase in these states once those joining government services from January 1, 2004 start retiring. The average age of employees in government jobs is 30 years, and hence the burden would increase from 2034 on these states, they say.

If politics could be viewed from short-term gains,  the move to switch over to OPS is a shrewd one but it entails long-term economic pain for the state exchequer.

There are defined benefits (DB) under OPS without any defined contribution from employees, but there are defined contributions under NPS without defined benefits. However, there may be a minimum assured return product under NPS too in the future.

"The rapidly rising global life expectancy has thrown DB pension systems like OPS into disarray. Many countries are struggling to honour the pension promises they had made many decades ago and are now being forced to increase contributions, reduce benefits and defer the retirement age," said Gautam Bhardwaj, a co-founder of pinBox Solutions, a global social pension Tech that helps developing countries set up inclusive pension systems for informal workers.

The NPS, on the other hand, takes away any future political or fiscal risk, he said.

Under NPS, the government's pension promises are explicitly honoured through a transparent co-contribution every month. "Employees, therefore, don't need to worry about issues that citizens in France or the US are now facing," Bhardwaj pointed out.

While NPS does mean a higher short-term cost, it is clearly the soundest long-term fiscal and social policy decision, he said.

However, there are contrarian voices too.

For instance, Anil Sood, professor, and co-founder of the Institute for Advanced Studies in Complex Choices, said the NPS believers talk about fiscal burden without sharing their analysis and label the shift to OPS as a populist measure.

"We have not been recruiting in government services for a very long time. The public sector employment peaked in 1997 at 19.56 million employees and was 17.09 million on March 31, 2012 – the year of last reported data," he pointed out.

Therefore, the argument that the costs will start increasing in near future is unlikely to stand scrutiny, he said.

"The current debate is grounded in the accountant's view of life," Sood opined.

A "faith-based" argument about the government not being able to afford is unproductive, he said. "If the government cannot afford to provide social security, how would a low-earning household with limited or no ability to take financial risk be able to provide for a 20-30 years of post-retirement life," he argued.