The Reserve Bank of India (RBI) has warned states against reverting to the Old Pension Scheme (OPS), which was in vogue until 2004, saying it will increase the tax burden on states in years to come. coming. The central bank said the OPS – instead of the National Pension Scheme (NPS) – would lead to the accumulation of liabilities which could become a major risk in the future.
What RBI said about OPS?
According to the RBI, a significant risk looming on the sub-national fiscal horizon is the likely return to the old pension system by some states.
“The annual savings in tax resources that this decision entails are short-lived. By postponing current spending, states are risking the accumulation of unfunded pension liabilities in years to come,” the RBI said in its “State Finance Report” on Monday.
According to budget estimates for 2022-23, states are expected to experience a 16% increase in pension expenditure to Rs 463,436 crore in 2022-23 from Rs 399,813 crore in the previous year, the RBI said. The compound annual growth rate (CAGR) of pension liabilities for the 12 years ending in FY22 was 34% for all state governments, according to a report by SBI Research.
Why are more states opting for OPS?
The RBI’s warning came after more states joined the queue to bring back the OPS instead of the National Pension Scheme (NPS). After Rajasthan, Chhattisgarh, Jharkhand and Punjab, Himachal Pradesh has announced its intention to opt for OPS. States have found it convenient to pay former retirees with money collected from serving employees.
Under the FPO, retired employees received 50% of their last salary in the form of monthly pensions. PAHO is considered financially unsustainable and state governments do not have the money to fund it. OPS had no accumulated funds or savings stock for retirement obligations and was therefore an obvious budgetary burden.
Interestingly, the scheme is still an attractive dispensation for political parties, as current seniors can benefit from it even though they may not have contributed to the retirement pool, according to the SBI Research report.
Old pension plan vs NPS
A legacy pension plan (OPS), commonly referred to as a pay-as-you-go plan, is defined as an unfunded pension plan in which current earnings fund retirement benefits. Under this scheme, the contribution of the current generation of workers was explicitly used to pay the pensions of existing retirees. The OPS involved a direct transfer of resources from the current generation of taxpayers to fund pensioners. While pay-as-you-go was popular in most countries before the 1990s, it was abandoned due to the problem of pension debt sustainability, an aging population, an explicit burden on generations futures and the incentive for early retirement (since the pension is fixed at the last salary received), indicates the SBI Research report.
The NPS is a defined contribution pension plan. The NPS allows an individual to undertake retirement planning while employed. With systematic savings and investments,
The NPS makes it easier to build up retirement capital during their working life. The NPS is designed to provide a sustainable solution of having adequate retirement income in old age or upon retirement.
The NPS is mandatory for central government employees joining the services on or after January 1, 2004, and nearly all state governments have adopted it for their employees. The NPS, regulated by the Pension Funds Regulation and Development Authority (PFRDA), is a contributory pension scheme under which employees contribute 10% of their salary (basic allowance + high cost allowance ).
The government contributes 14% to employee NPS accounts. As of December 2022, 59.78 lakh state government employees were part of the NPS, with total assets under management of Rs 4.27 lakh crore.