Govt likely to Ensure Minimum Pension for Employees with 40%-45% of Last Salary

According to undisclosed government officials as reported by the news agency, Reuters, the Central government is expected to modify the current market-linked pension scheme in order to guarantee the central government employees a minimum pension of 40%-45% of their last drawn salary. This move aims to address the concerns of certain states and establish a unified and financially sustainable pension scheme across the country. The government formed a committee in April to review the pension system amidst upcoming state elections and the 2024 national elections, where Prime Minister Narendra Modi will seek a third term.

The existing pension system, implemented after a significant fiscal reform in 2004, requires employees to contribute 10% of their basic salary, with the government contributing 14%. The final pension payout depends on the market returns of the invested funds, predominantly in government debt. However, some states have reverted to the older pension system, which guarantees a fixed pension of 50% of an employee's last drawn salary without any contributions during their working life. To address this situation, the government plans to amend the current scheme, ensuring both employees and the government continue making contributions while employees receive a guaranteed pension of 40%-45% of their last drawn salary.

It is important to note that the government has no intention of reverting to the old pension system, as stated by a senior government official. The officials providing this information have chosen to remain anonymous due to the confidentiality of the discussions. At the time of reporting, the Union Finance ministry had not responded to Reuters' queries.

The government believes that this proposed compromise will alleviate the concerns of states that have transitioned back to the old pension system and establish a financially sustainable pension scheme nationwide. Recent instances of states opting for the old system include Rajasthan, Jharkhand, Chhattisgarh, Himachal Pradesh, and Punjab. Pensions account for a substantial portion of the Union Budget's expenditures.

According to the government officials, the revised pension scheme will have a lesser impact on budget calculations. Currently, employees receive approximately 38% of their last salary as pension. If the government guarantees a 40% return, it will only need to cover a 2% shortfall, as explained by the second official. However, the financial burden will increase if market returns on the pension corpus decline. Nevertheless, this option is deemed more fiscally viable than reverting to the old pension system since employees will continue to contribute, and a significant portion of the pension will be funded through market returns, the official added.