A comprehensive study conducted by the Reserve Bank of India (RBI) has sounded a cautionary note against a potential return to the Old Pension Scheme (OPS) in India. This meticulous analysis estimates that the adoption of OPS would result in a substantial fiscal burden, surpassing the existing National Pension System (NPS) by a staggering factor of 4.5.
The RBI report underscores the adverse repercussions such a move could have on the nation’s financial health. While some states have considered reverting to OPS in pursuit of short-term reductions in pension liabilities, the study emphasizes that this would be overshadowed by the inevitable surge in unfunded pension obligations over the long term. This, in turn, could lead these states into fiscal stress of unsustainable proportions.
Notably, five states, namely Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh, have already announced their intentions to reintroduce OPS for their government employees.
To address this situation, the central government has established a committee, led by Finance Secretary T. V. Somanathan, tasked with devising strategies to maintain the attractiveness of NPS for government personnel without overburdening the treasury with unfunded liabilities.
According to the RBI report, the financial implications are significant. In Rajasthan, OPS would entail an outlay 4.2 times greater than the new scheme, while for Chhattisgarh and Jharkhand, the multiplier stands at 4.6 and 4.4, respectively. Punjab and Himachal Pradesh would face factors of 4.4 and 4.8, respectively.
The report concludes that any shift back to OPS by states would be fiscally unsustainable. Such a move would represent a substantial step backward at a time when many countries worldwide are transitioning from ‘defined benefit’ to ‘defined contribution’ pension plans. It would not only undermine the advantages of prior fiscal reforms but also jeopardize the interests of future generations.
The study’s findings align with previous reports that indicate pension-related expenses in OPS could be 4-5 times greater than in NPS. Even when varying assumptions on salary growth and discount rates are considered, OPS remains more than three times as costly as NPS.
It’s crucial to note that state governments can readily announce OPS since it falls under the category of a ‘defined benefit,’ where pension amounts are predetermined. In contrast, NPS operates as a ‘defined contribution’ system, with the government contributing a fixed sum to the fund with each salary disbursement. Upon retirement, employees utilize this fund to purchase annuities, the returns of which are contingent on interest rates and life expectancy at the time of retirement.
In summary, the RBI’s study serves as a stark reminder of the financial implications associated with the revival of the Old Pension Scheme, cautioning against hasty decisions that could have far-reaching consequences for India’s fiscal stability and long-term economic well-being.
