By Sriniket Bandaru

Abstract

As Himachal Pradesh joins Rajasthan, Jharkhand and Punjab in the club, it is plausible that the trend of restoring the Old Pension Scheme (OPS) could be dying anytime soon. The oversaturated debate on freebies has now been replaced by a policy revival only intended to serve electoral purposes. Unlike freebies, reviving the OPS is not just a dangerous precedent but a timed bomb they cannot set off. In this article, we will discuss the actual cost of adopting the old pension scheme at present and for posterity.

Introduction

The New Pension scheme (NPS) was introduced in 2003 by the Central government in order to reduce the liabilities caused by the burgeoning burden of pensions. It is also important to note that BJP were the incumbent who proposed this policy. In the proposed scheme, NPS reduced the financial burden on the government by transforming from a defined benefit to a contributory scheme. Unlike its predecessor, a contributory scheme requires both the employer and the employee to contribute to the pension fund. 

The National Pension Scheme, in specific, states that the employee would give 10% of their monthly salary, and the government would match that amount (the government has raised their contribution to 14% now). This amount would be invested in equity or bonds by a fund manager of the employee’s choosing. Once the employee retires, they can withdraw 60% of the corpus, and the remaining 40% needs to be invested in an annuity that would provide interest annually. 

The old scheme can also be referred to as Pay As You Go or PAYG. In this scheme, there are no provisions for accumulating funds, and the current year’s budget should be allocated for all who can avail pension. The PAYG strain on the state’s coffers was much higher than the proposed NPS, as the pension debt burden kept rising every year. In a report by the State Bank of India, if all the states decided to adopt the OPS, the present value of future liabilities would be 13% of the GDP. This future liability is called the ‘implicit public pension debt’. 

Understanding the demographics

India’s unique demographic status needs to be also factored into, providing further detail on the implicit pension debt. Our country’s expected life expectancy has been rising and has reached the 70-year mark. Next, India’s health improvements have resulted in increased longevity, leading to the share of those above 60 doubling by 2050. Finally, the dependency ratio is a parameter that calculates the proportion of the non-working age population to the working age population. India’s old-age dependency ratio will rise to around 35% from 19%. 

Given that the PAYG scheme does not hold any accumulated funds, the financial burden of this ever-increasing dependent population will fall on the relatively smaller working population. PAYG scheme, hence, is even more disadvantageous and dangerous. They threaten the intergenerational equity of public debt, which states that those who receive public goods and services should pay for them, not future generations. In this case, the present government should pay for the corpus and keep pushing their responsibility away.

Political motivations

In an article by The Indian Express, Arvind Panagariya explains that poll promises should not create long-term liabilities that will not be paid by the party that promised it. Promising OPS is essentially doing so. He adds that political parties who have done this are committing a sinful act, as the earliest liability would only arise ten years from now. Another reason could be that state governments are trying to mitigate the risk before the economic downturn occurs, which many economists predict will happen soon.

Pension liabilities are not stable; they are increasing at a steep rate. SBI’s report showed how the Compounded Annual Growth Rate (CAGR) of pension burden for the 12 years had been 34% across all states. The report also stated different states’ total committed expenditures (Interest payments, salary and pension payments). For instance, a series of four states (Punjab, Kerala, West Bengal and Andhra Pradesh) total committed expenditure of their state revenue receipts ranges from 149% – 191%. These staggering high percentages would worsen when the pension liabilities that OPS would bring ten years from now if they all decide to revert to the old policy.

Equity

In the same article, Arvind Panagariya mentions that once OPS is adopted, 12-13% of the state revenue is committed to roughly 2% of the population (government employees). This statement raises the question of equity; whether giving such a large slice to a small group is right and equitable. If pensions are highly prioritized, is the government leaving behind the rest 98%, especially those in need of state infrastructure? 

The revival of the Old Pension Scheme brings into question much more than a populist move. It questions whether such an intergenerational transfer is fair in an ageing country where the ever-increasing debt burden can keep future governments financially afloat. Ultimately, it is upon the states to decide whether the fear of economic downturn or mere populism should dictate the fate of the rising financial burden saved for the future.

About the Author

By Sriniket Bandaru, a B.A. Economics (Hons.) student from O.P. Jindal Global University

Image Source: The Economic Times