Old pension and new challenges

Despite facing stiff opposition from the supporters of the National Pension System, the governments of five states—Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh—have reintroduced the Old Pension Scheme. The Karnataka government is in the process, and the Telangana government is likely to revert to the Old Pension Scheme (OPS) soon, fulfilling its poll promise. 

The resurgence of the OPS across states and may be at the Centre appears inevitable for the new government after the 2024 elections, given the success of the employees achieving their demand in these states despite the central government’s resistance. The Centre, however, continues to create new hurdles. For instance, in a reply to a recent parliamentary question, Pankaj Choudhary, minister of state for finance, said that the PFRDA 2013 and other related regulations do not provide for the refund of the contributions to the state governments, which means the state governments that have switched to OPS are going to have a tough time getting back their money from the pension fund. 

The Government of India replaced OPS with the New Pension Scheme (NPS), with effect from January 1, 2004. The OPS entailed a pension of about half the last drawn salary to its employees without any contribution from them towards any pension fund, while the NPS required the employees to contribute 10% of their basic and Dearness Allowance (DA) to the pension fund and a matching contribution (enhanced to 14% since 2019) from the employer. When they retire, the employees get 60% of their accumulated money, along with returns on it.

They are required to invest the remaining 40% in the annuities of life insurance companies. Thus, the NPS is far inferior to the OPS and undoubtedly detrimental to government employees’ interests. Besides the central government, all the states except West Bengal have imposed this on their employees. Although Tamil Nadu has accepted the NPS, it has not implemented it earnestly. 

Employees all over India are naturally against the NPS. Their agitation has intensified, with a few states reverting to the OPS. For instance, the railway employees have threatened to go on strike from May 1 if the OPS is not allowed to them.

The main argument against accepting the employees’ demand is the burgeoning financial burden on the exchequer as a result of pensions given to government employees, who constitute a minuscule, less than 4% of the total workforce in the country. A recent RBI Bulletin article (September 2023) argues that “the cumulative fiscal burden in the case of OPS could be as high as 4.5 times that of NPS, with the additional burden reaching 0.9% of GDP annually by 2060.”

The short-run reduction in the outgo with the discarding of the NPS and the monthly payments towards it is no comfort because the long-run burden with the reintroduction of the OPS will be untenably high since it is an unfunded pay-as-you-go model that entails payments out of the current revenues, whereby the government’s capital expenditure gets eroded with the resultant adverse impact on output, income, and employment.

They fear the burden will increase with the increasing life expectancy; the UN has projected the global life expectancy to go up to 77.2 years in 2050 from 72.9 years in 2022, with the share of people above 65 years in the population swelling from 10 to 16%. 

When the critics themselves agree that the OPS is for a small proportion of the workforce, how can they say the burden increases in proportion to the GDP? Economist Prabhat Patnaik (People’s Democracy, January 14, 2024) raises the question: “While the government boasts of a fast growth of the economy, the fastest in the world with the likelihood of reaching $5 trillion, how can it be a burden to pay pension under OPS?” Patnaik also says that the pension burden will not increase in real terms since governments do not revise the pension amount in tandem with rising inflation.

The extremely materialistic approach of the opponents of OPS is that the burden is a result of the increased longevity of people. The government should welcome and feel happy if life expectancy is increasing and should not feel it as a burden. Also, it should be understood that the increased life span calls for increased governmental assistance, not its reduction.

In a welfare state, the government should act as an ideal employer and pay decent pensions to its employees, setting a good example for the private sector. It should work towards a decent pension scheme in the non-government sector, too. The goal should be to revert to the OPS in government and to work towards a similar scheme in the private sector, but it should not be to reduce the existing benefit anywhere.

(The writer is a development economist and commentator on economic and social affairs)