PM Narendra Modi during his Rajya Sabha address on Thursday warned the states of the economic crises in neighbouring nations. In a possible mention of the Old Pension Scheme, which has been readopted by some of the states recently, PM Modi said political parties should be thoughtful about its steps and shouldn’t be toying with the future of the country’s children. He said the states should be financially disciplined.
“We, in our policies, have kept national progress in mind and have also addressed the regional aspirations,” PM Modi said on Thursday while replying to the ‘motion of thanks’ debate on President Droupadi Murmu’s address in Rajya Sabha. “The perfect combination of national progress and regional aspiration has been visible in our policy,” he added.
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It is to be noted that the governments of five states — Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh — have informed the Centre about their decision to revert to the old pension scheme.
In a written reply in the Lok Sabha, Bhagwat Karad, Minister of State for Finance, said as per RBI’s report titled ‘State Finances: A Study of Budget of 2022-23’, the annual saving in fiscal resources that reversion to the old pension scheme entails is short-lived.
He said that by postponing the current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years.
“The state governments of Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have informed the central government/Pension Fund Regulatory and Development Authority about their decision to restart Old Pension Scheme for their state government employees,” Karad said in his reply.
He added that there is no provision under the Pension Fund Regulatory and Development Authority (PFRDA) Act vide which the accumulated corpus of the subscribers, viz governments’ and employees’ contribution towards NPS along with accruals, can be refunded and deposited back to the state government.
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The Reserve Bank of India (RBI) too had cautioned states against reverting to the Dearness Allowance-linked old pension scheme, which was in place till 2004. The central bank said that it will add to the fiscal burden of states in the coming years.
The old pension scheme was first discontinued by the BJP-led NDA government in December 2003. The new pension scheme was adopted on April 1, 2004.
Under the OPS, retired government employees received 50 per cent of their last drawn salary as monthly pensions. The amount keeps increasing with a hike in the DA rates. “OPS is not fiscally sustainable as it is not contributory in nature and the burden on exchequer keeps on mounting,” the report stated.
Top economists at the BT Banking & Economy Summit held in January said that the Old Pension Scheme has can be a disaster and is a ticking fiscal time bomb.
Saugata Bhattacharya, Executive VP & Chief Economist, Axis Bank, said: “The problem with OPS is it is benefitting a bunch of people who are on the top. Calculating all the expenditures, you have some 10-15 per cent of your receipts for development expenditures. The commitment to OPS is going to affect the development commitments. This is not sustainable in the longer run.”
“OPS is an unfunded pension and is therefore a pressure point. There is enough evidence globally, that unfunded pension schemes can lead to extreme fiscal stress at some point in time. It would be if can get that out. The New Pension Scheme is much better as at least there is funding for it,” said D K Joshi, Chief Economist, CRISIL.
Under the old pension scheme, employees get a defined pension. Under this, an employee is entitled for a 50 per cent amount of the last drawn salary as a pension. However, the pension amount is contributory under the National Pension System, which is in effect since 2004.
Several economists too have expressed concern over reverting to the OPS saying it would put stress on states’ finances. Former Deputy Chairman of the erstwhile Planning Commission Montek Singh Ahluwalia recently spoke against bringing back the OPS, saying it is one of the biggest ‘revadis’.
For 2022-23, the RBI report said states have budgeted an increase in revenue spending, mainly led by non-developmental expenditure such as pension and administrative services.
(With agency inputs)
