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What is the fiscal space for the old pension scheme? Should states design OPS or more broad-based social protection measures with an identified fiscal space? Only government employees, who constitute barely 2% of India’s population, stand to benefit from OPS. OPS guarantees government employees 50% of their last drawn pay plus Dearness Allowance (DA) as post-retirement income for life, and any eligible dependent family members in the event of the employee’s death Gives 50% of that pension. The OPS income received by the recipient is not subject to income tax. There remain concerns that the OPS will soon become financially unviable as it has no means to fund the rising pension liability with the current tax buoyancy.
demographic factors
Given the demographic changes, it is highly likely that the pension liabilities of governments will increase further in the future. This would result in increase in life expectancy, periodical increase in DA, and linking of pension to existing pay levels. It encouraged early retirement as the pension was based on the last salary earned. Due to this early retirement, the government had to underutilize its personnel resources. Old Age Social and Income Security (OASIS) Initiative was launched in January 2000 With a view to reform the pension system to include the unorganized sector. Thereafter a High-Level Expert Group (HLEG) was set up under the chairmanship of BK Bhattacharya, and it recommended a hybrid contributory pension scheme for government employees. In 2004, the government implemented the New Pension System for all government employees, as envisioned in the OASIS project.
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The New Pension Scheme (NPS) is a scheme in which employees pay into their pension fund from their salaries, with the government matching their contributions. NPS contribution is handled by professional fund managers like LIC, ICICI etc. NPS enables subscribers to choose their preferred fund manager and investment options including 100% Government Bond option. When employees retire, they get 60% of the corpus tax-free, while the remaining 40% is invested in annuities, which are taxed. There is no General Provident Fund (GPF) benefit, and the pension amount is not fixed. Unlike OPS which was limited to government employees, NPS allows all Indian citizens (including NRIs) between 18 and 70 years of age to participate.
NPS vs OPS
Despite the benefits of NPS, which include freedom to choose pension fund and investment pattern, reduction in government retirement obligations, and higher returns than traditional instruments like Public Provident Fund (PPF), few governments and employees are keen to return to NPS . Ops. This is because the employees are concerned that the new NPS will not provide the same benefits as the OPS. Due to the volatility of the market, they feel that their money will not be safe in the hands of the fund managers and their pension may be reduced. This leaves the employees with less disposable income as they also have to contribute under the scheme.
In contrast, under OPS, the government bears the entire cost, while employees get higher discretionary income and pension guarantees. Given the increase in salary and other benefits offered by the private sector, the unpredictability of NPS in future may deter many talented individuals from entering the government sector. Some experts even call it a populist move because the workers are a vocal and influential lobbying group. They also implement government policies and programs, so widespread discontent among them can have a negative impact on results.
Can OPS survive? In 2004, researchers at the Indian Pension Research Foundation calculated the underlying pension debt (IPD) to be approximately 64% of India’s GDP. According to a report published by the Asian Development Bank (ADB), the annual financial cost of the civil service pension program increased from less than $0.5 billion in the 1980s to nearly $30 billion in 2012. During the period 2007-08 to 2013-14, the Seventh Central Pay Commission has reported a three-fold increase in pension expenditure. It further claims that the government’s contribution towards OPS (excluding Railways) has increased from Rs 924 crore in 2011-12 to Rs 1,200 crore in 2012-13 to Rs 1,600 crore in 2013-14.
The issue of fiscal sustainability of OPS has also been highlighted by RBI’s report on State Finances. The states with the largest debt in terms of debt-to-GDP ratio in 2020-21 are Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana. These 10 states account for more than half of all state government expenditure in India. In highly indebted states such as Haryana, Uttar Pradesh, West Bengal, Kerala and Punjab, committed expenditure, which includes interest payments, pension and administrative expenditure, accounts for more than 35% of total revenue expenditure. It reduces the financial resources required for undertaking developmental expenditure. In 10 states, pension expenditure alone accounts for 12.4% of total revenue expenditure (on average from 2017-18 to 2021-22) and it is estimated that pension outlay will be between 0.7% and 3% of GSDP by 2030-31. To make matters worse, own tax revenue has declined in states such as Madhya Pradesh, Punjab and Kerala, and non-tax revenue has declined sharply in most states in recent years. Therefore, apart from fiscal stability issues, implementing OPS would also introduce inter-generational inequalities.
Jitesh Yadav and Balamurali B. Researcher at National Institute of Public Finance and Policy (NIPFP), New Delhi. Lekha Chakraborty is a professor at NIPFP and a member of the governing board of the International Institute of Public Finance, Munich