BJP’s electoral success casts doubt on reverting to old pension system

Following the Bharatiya Janata Party's successful takeover of Rajasthan and Chhattisgarh from the Congress, the fervent debate surrounding the National Pension System (NPS) versus the Old Pension Scheme (OPS) seems poised to lose traction. It appears that the central government may not rush into altering the NPS framework.

Rajasthan became the initial state to revert to OPS, followed by Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh. The Gehlot government's decision to reintroduce OPS was touted as a potential game-changer. Subsequently, this became a pivotal point for the Congress in Himachal Pradesh's elections. After securing victory, the Congress administration in the hill state made reinstating OPS one of its cabinet's key decisions. A similar promise appeared influential in Karnataka, although the state government is yet to fulfil this pledge post-election.

Numerous economists, including the RBI, have voiced strong opposition to reinstating OPS, citing concerns that this move could disrupt the fiscal equilibrium of the states. OPS involves a defined benefit structure where the government shoulders the entire financial burden. Conversely, NPS operates as a defined contribution system, relying on contributions from employees and the government to fund pension expenses. NPS was implemented for Central Government employees (excluding armed forces) from January 1, 2004, and nearly all states, barring West Bengal and Tamil Nadu, adopted the NPS.

By the end of November 2022, the cumulative count of state government employees subscribing to NPS had reached approximately 5 million, contributing a total of ₹2.5 lakh crore to the NPS corpus.

A recent commentary in the RBI's bulletin cautioned against states reverting to OPS, highlighting that such a move could lead to substantial fiscal strain in the medium to long term. The article projected that the cumulative fiscal burden of OPS could be 4.5 times higher than that of the New Pension Scheme (NPS), with an additional burden equivalent to 0.9% of GDP annually by 2060. Consequently, any short-term reduction in pension expenditure could be overshadowed by a significant surge in future unfunded pension liabilities.

Currently, a committee headed by Finance Secretary T V Somnathan at the central government level is reassessing NPS and has been tasked with evaluating if any alterations are necessary within the existing framework applicable to government employees. The committee's recommendations will consider fiscal implications and the impact on the overall budgetary space, emphasizing the need for fiscal prudence to safeguard the interests of the general populace. When queried about a timeline, Somnathan indicated that discussions are ongoing.

Meanwhile, Telangana, Rajasthan, Madhya Pradesh, Chhattisgarh, and Mizoram—all with limited fiscal leeway—face constraints on implementing populist measures. As per the FY24 budget estimates, their fiscal deficits range from 2.9% to 4.2% of GSDP, while all these states exceed the 20% debt-GSDP benchmark stipulated by the 2018 FRBM amendment. Rajasthan and Mizoram have debt-GSDP ratios surpassing 30% (37.3% and 41.2%, respectively).