EVALUATE THE POLITICAL AND ECONOMIC IMPLICATION OF OLD

PENSION SCHEME

Surabhi Singhal

With the state governments of Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal
Pradesh reverting back to the Old Pension Scheme (OPS), there are similar demands being made
by the employees of other states.

In December 2003, the BJP-led NDA government announced that the New Pension Scheme
(NPS) would take the position of the Old Pension Scheme (OPS) as of April 1, 2004. It was done
to replace the defined benefit pension system with defined contribution pension scheme. This
was done to ensure that the old age income security provided by the government from the
taxpayer’s money is fiscally sustainable. The objective was to channelize small savings into the
productive sectors of the economy through prudential investments. According to PFRDA, as of
now, 26 State Governments except Tamil Nadu and West Bengal have implemented NPS in their
states.

WHAT IS OLD PENSION SCHEME?

Old Pension Scheme or OPS is a life time benefit available to the employees of the state
government post- retirement. It guaranteed the employee would receive a specific sum of money
following his retirement. Under the OPS the employee would receive as pension 50% of their
last drawn basic salary along with the benefit of Dearness Relief which was revised twice a year.
OPS, also known as Defined Benefit Scheme ensured that the employee gets a fixed monthly
payout without any deduction. The pension was non-taxable. Moreover there was also the
provision for General Provident Fund (GPF). It allowed the government employees to save a
certain percentage of their salary to the GPF. The accumulated amount in GPF was to be payable
to the employee at the time of retirement.
So, if the basic salary of a government employee is Rs. 25,000, then he would receive a definite
amount of Rs. 12,500 as pension. Also, the pensioners would get benefit from the indexation in
the form of dearness relief (like DA of existing employees)

The government covered the full cost of the Old Pension. Every year the budget for pensions
used to be announced during the budget announcement. The annual DA rise in the pension was
funded by both the federal and state governments. The scheme was discontinued in 2004.

Issues with OPS and why was it revoked

The primary issue was that the pension obligation was still unfunded, meaning that there was no
corpus created especially for pensions that would increase over time and could be used to make
payments. Every year, the budget of the Indian government provided for pensions, but there was
no clear strategy for how they would be paid in the future.

The OPS was unsustainable for various reasons. Firstly, since pensioners' benefits grew annually,
the liabilities would keep on increasing. And like the salaries of current employees, pensioners
also benefited from indexation, or what is known as "dearness relief," Secondly, improved
medical services would prolong life expectancy, which would result in longer payouts. This has
caused a massive burden on the fiscal health of the State.

Economic implication of the Old Pension Scheme

The RBI has in multiple reports flagged the fiscal imprudence of a return to OPS as it increases
the central government’s liability manifold. It said that it will be risky for the financial security
of states. “A major risk looming large on the sub-national fiscal horizon is the likely reversion
to the old pension scheme by some states. The annual saving in fiscal resources that this move
entails is short-lived. By postponing the current expenses to the future, states risk the
accumulation of unfunded pension liabilities in the coming years,” RBI said in a report.

There are currently 34.7 lakh employees and 48 lakh pensioners in the central government.
Although the projected outflow on salaries for FY23 (Rs 2.68 lakh crore) is greater than the
projected outflow on pensions for the following five years (Rs 2.07 crore), the number is
likely to change. In the instance of the armed forces, the cost of the 3.5 lakh retirees accounts
for more than 22% of the total defense budget of Rs 5.25 lakh crore. Additionally, 55,000
veterans are added to this roster each year. This perhaps explains the government's thrust on
'Agniveers' — the Army is leaner and younger, and in the long run, resources are freed up for
R&D, defence procurement, and military infrastructure.

Political Implication of the Old Pension Scheme

As more workers in Maharashtra and Haryana went on strike on Tuesday in support of the Old
Pension Scheme, the demand for its restoration is increasing like a wild fire especially in states
where elections are due. Some non-BJP states have already abandoned the NPS and gone back to
OPS, including Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh. After
reverting back to OPS in Rajasthan and Chhattisgarh, the congress party is also promising to
restore it in Gujarat and Himachal Pradesh. With its expansion outside of Delhi, AAP's national
aspirations are growing, and it has its sights set on the forthcoming elections in Gujarat. The
National Movement for Old Pension Scheme (NMOPS), the umbrella body leading protests
across states to restore OPS. It has asserted that it would support the party that delivers OPS to
the State unconditionally in the upcoming assembly elections of Gujarat and Himachal Pradesh.
This largely explains AAP's prompt action to reinstate OPS in Punjab. Reintroducing OPS with
success in the state of Punjab, where AAP is also in control, would help the party achieve its goal
of becoming a national party.

Though there will be a short term benefit as the government will not have to put 10% in the
employee pension fund, but in a longer run it may not be proved that fruitful as eventually the
burden of the pension will fall upon the present taxpayers. Also the old pension scheme caters to
the demand of government employees only. It has no benefit to the bulk of other workforce
particularly unorganized sector, which does not get any benefit from the OPS but are very
significant in electoral sense.
States lose a quarter of their tax income to pension payments. Pensions as a proportion of state
tax revenues are almost 80% for Himachal, almost 35% for Punjab, 30% for Rajasthan, 24% for
Chhattisgarh, 15.33% for Gujarat and 30.66% for Jharkhand. When employee wages and salaries
are factored into this measure, the amount of tax revenue that the states retain is remarkably
small. It cannot be smart politics to use a portion of taxpayer funds to fund a small group of
pensioners.

The larger problem of intergenerational equity also needs to be looked upon. The ever-increasing
pensions of seniors are being paid for by today's taxpayers. The pension of someone who retired
in 1995 may very well be the same as that of someone who quits in 2025 thanks to generous
awards made by the Pay Commissions. As things stand, the current generation of taxpayers not
only pays for the pensions of those who began working for the government prior to 2004, but
they also contribute to the 10% payment that the state governments have been making for those
who began working after that date. It snatches away from the resources of the state which can be
utilized for the developmental and welfare activities for the underprivileged workforce in
particular and public in general, who are paying taxes at present.

Conclusion
The NPS was introduced on the basis of OASIS report. The government commissioned a national project,
OASIS – an acronym for “old age social and income security” – was commissioned by the government in
1999, to address the issues of ballooning pension bills and to examine policies related to old age income
security in India.

Dissatisfaction among employees with NPS has been addressed by the central government to a larger
extent. It is also expected to evolve in future. The NPS was criticized for two major reasons. The first,
which deals with death and disability, has already been covered. The expected corpus that would be
made available to them at the conclusion of their service period was the second area of concern. The
returns are anticipated to be significantly higher than the typical fixed deposit rates at the bank or the
post office, the financial instruments favored by the typically risk-averse government employees, given
the strong state of the economy.

The concession made by the Union government for the workers' next of kin makes the most sense for
state governments to imitate. But they must refrain from populist actions that would further jeopardize
their budgetary stability, such as the restoration of the OPS. The capacity of the states to absorb
resources is undoubtedly much lower than that of the central government. They must keep in mind that
their decisions affect 1.32 crore employees or three times as many as those employed by the central
government. We must all keep in mind that it is much harder to persuade parties to support a long-term
vision of economic stability than it is to renege on an agreement in order to gain an advantage in an
election. One expects that common sense will win out because the NPS was a great example of
agreement between the NDA and the UPA. Let's avoid burdening future generations with debt to fulfill
promises made to win votes