Elections are near in major states and talk of going back to India’s old government pension system is growing louder. Himachal Pradesh state Congress chief Pratibha Singh recently promised that the party would bring back a defined-benefit package within 10 days if voted to power, echoing a promise made by party leader Rahul Gandhi in Gujarat, a and headed for the state elections. And it’s not just Congress. The Aam Aadmi Party has also switched-back its agenda, while the Samajwadi Party also clarified its stand by criticizing the ruling Bharatiya Janata Party (BJP) for shifting government employees to the contribution-based National Pension System (NPS). Is. 2004. Chhattisgarh, Jharkhand and Rajasthan have already returned and Punjab is trailing. These states have non-BJP governments, indicating the convergence of the opposition on the issue to gain political points. Fiscal commitments with bills due decades later are politically expedient, but such populism is also why fiscal reforms are so difficult. And why should we not shy away from hard-earned gains on a key aspect of fiscal correctness: We must not burden future generations who are not in a position to consent to their ballots. Pensions include payments so far that they are a perfect test case.
On 1 January 2004, central and state government pensions were transferred to the NPS, which acts like a retirement fund, promising to pay monthly pensions, depending on their tenure. How much fund grows with the amount pre-determined by the workers during the period. Work life (and by employers). Like any long-distance investment plan, it is a tough sell compared to the old assurance of a fixed portion of your last drawn salary, raised regularly for inflation, until the last breath – a fixed payout. Workers naturally place a higher premium on income certainty the more they believe they will need it for old age. But offering this certainty could be overwhelming for the government. Over the decades, as state enrollment in India expanded and life spans increased, a bloated budget for employee transfers began to eat into other outlays. In any case, everyone else had to invest for old age, as private jobs rarely got the same privilege of lifetime open-ended transfers. A reasonable long-term solution therefore lies in a slow shift that will relieve the future budget of pension payments and instead have workers (and the state) put money in a savings plan for later payments.
Going back could cripple the finances of states already grappling with heavy pension obligations. A research report by the State Bank of India has estimated that the total committed expenditure of states in 2020-21 is 125% of their own revenue receipts, with pensions accounting for a large proportion for many. Poorer states can afford even less budget payments, especially since they have other significant uses of public money. We all must accept that government employment in a country of limited resources has been very liberal for a very long time. In addition, defined benefits are financially unstable. We need a political consensus on this, an agreement that future administrations don’t want to fund to deploy in other ways. Inter-generational equity is an important ethic in public finance. So all states should stay away from populism and go with NPS option. It is not only financially savvy, it also puts private and public sector employees on an equal footing. Most of us invest as we move forward – in the hope that what we keep is enough to meet our work-life financial needs. It should be same for all.
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