25 Mar, 2022 7:07a.m.

SBI research says return to Old Pension Scheme from NPS is unsustainable


According to SBI Research, switching back from the new pension scheme (NPS) to the old scheme, also known as PAYG (pay-as-you-go), would be equivalent to committing fiscal hara-kiri, or suicide. Rajasthan and Chhattisgarh state governments recently announced that they are reverting to the old pension scheme in order to keep their election promises. According to an SBI research note, the PAYG scheme is not financially sustainable for the state, despite the fact that it is always an appealing option for political parties because current retirees can benefit from the old scheme even if they have not contributed to the pension fund.

"We should not go to fiscal nihilism in the name of populism." Otherwise, it will be disastrous for the country's growth potential while also putting a greater burden on our youth!" According to the report, SBI Group Chief Economic Adviser Soumya Kanti Ghosh was the author.

Old pension scheme vs the new: problem of fiscal burden, ageing population

Prior to the 1990s, the PAYG scheme was popular in most countries, but it was phased out due to the problem of pension debt sustainability, an ageing population, explicit burden on future generations, and the incentive for early retirement, according to the report. It went on to say that the PAYG scheme had no accumulated funds or stock of savings for pension obligations, and thus was a clear fiscal burden.

As of February 2022, there are 55.44 lakh contributing state-level employees, according to NPS Trust data. According to the SBI note, if all states migrate to the old scheme, the current present value of the implicit pension liabilities is around 13% of GDP, discounted by the current G-sec yield of 40 years. This is based on a 28-year-old entry-level employee and a 5% inflation rate.

The report also stated that when the population is young, the government can provide generous benefits, but as the population ages, their pension debt increases. The ageing index and old-age dependency ratio are expected to rise in India, based on its demographic profile. By 2036, the Aging Index is expected to rise to 76 from its current value of 40, and the old-age dependency ratio will rise to 23 percent from its current level of 16 percent. As a result, it will place an additional burden on the working-age population, which will be unfair to the younger generation.

Populism and old pension scheme

In 1999, the country began reforming its pension system. With the exception of West Bengal and Tamil Nadu, all states had voluntarily switched to the new pension scheme by 2004. As the 5th Pay Commission pointed out, the old pension scheme raised concerns about the state's ability to meet its pension obligations. According to the SBI report, the long-term trends in state government pension liabilities show a very sharp increase. The CAGR in pension liabilities for the 12 years ending in FY22 was 34 percent, according to the report.

Several political parties in states such as Andhra Pradesh, Uttar Pradesh, and Madhya Pradesh have pledged to repeal the new national pension scheme over the years.

Contributions from the current generation of workers were used to pay current retirees' pensions under the PAYG scheme. As a result, the old scheme relied on a direct transfer of funds from current tax payers to fund the pensioners. According to the Budget 2022 proposal, the employer contribution for both central government and state government employees will be 14 percent of their salary, while employees will contribute 10%.

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