The conclusions in a recent paper by a group of Reserve Bank of India (RBI) officials should serve as a stern and timely reminder to the state governments reintroducing unfunded pension schemes for their staff. The paper warns that bringing back the Old Pension Scheme (OPS), which was in vogue till 2004, may look lucrative for the states in the short-run, but the future burden of higher pension outgo would eclipse such gains. The authors of the paper estimate that if all states embrace OPS, the additional outgo would be on a par with what it would have been under the New Pension System (NPS) by as early as mid-2030s, and eventually exceed it by 2040. “Thereafter, the additional burden will increase rapidly, reaching around 0.9% of GDP annually by the early 2060s,” they warn, while estimating the fiscal cost of OPS to be 4.5 times that of NPS.
Government employees are just over 5% of India’s workforce and have a shrinking share, but their organised clout continues to be so strong that no political dispensation would dare lose their confidence. That’s why a committee headed by the finance secretary is now exploring ways to address the issue. The review is in the wake of the less-than-satisfactory pace at which the NPS is being adopted in the private sector. The Congress’ electoral success in Himachal Pradesh, after promising to re-launch defined-benefit pension, too may have prompted the rethink. Reports suggest that the committee may favour a hybrid scheme. This might combine the elements of defined benefits (OPS) and defined contribution (NPS), and provide for certain benefits to be assured, with benign contribution from the employees.
There is a need to dispel the notion that OPS is a pro-worker or pro-people scheme, and the NPS is not. Over 80% of India’s workforce is still in the informal sector, and deprived of decent employment benefits, leave alone old-age income security. In such a situation, for a small fraction of the workforce to enjoy generous, assured pension without due contribution amounts to undue privilege. OPS for public employees necessitates transfer of resources from the current working population to the retired, and constrains development expenditure, which is essential to promote growth and lift people out of poverty.
Some of the states such as Punjab that have announced the reversion to OPS spend on pension as much as a third of what is expended on development. Nearly two decades after launch of NPS for new recruits, the situation is not much better for the Centre either. This is because OPS bounty is configured to replace up to 50% of the last drawn pay, upon superannuation, and the value of the “deferred compensation” is fully indexed to inflation. With the rise in life expectancy, the provision to raise the recurring benefit to 60% replacement upon completion of 80 years of age, and by 10% in every five years thenceforth, have meant slow mitigation of OPS costs for the Centre. For sure, OPS variants launched by the state governments include those that require contribution from beneficiaries. It is also true that the value of assets supporting retirement systems declined in most OECD countries in 2022, and the situation continues to be worrisome. But that doesn’t disprove the long-term economic rationale for funded, market-linked pension systems. The government has sought to extend at least a modicum of social security to larger sections of workers. It must resist the political pressure to abjure pension reforms.