It was about two years back on Nov 13,2022 when world renowned economist, Dr Arvind Pangariya, presently chairman of Niti Ayog, described the poll promise of restoration of Old Pension Scheme(OPS) by some parties as “morally erroneous” and “Sinful Act “as it was bound to create a huge liabilities for the next governments at centre and states. Pangariya’s strong viewpoint was echoed by Rajiv Mehirishi, former union finance secretary and EX CAG who had sharply reacted when the former Congress government in Rajasthan decided to revert back to OPS in 2022. Mehrishi felt that it was prompted by 2023 assembly polls and predicted that it will encourage other states to follow suit and it may prove financially suicidal step. The Reserve Bank of India had also warned the state opting for OPS as it will ruin the economy in future.
In this backdrop, with an eye on state polls in Haryana, Jammu and Kashmir, Maharashtra and Jharkhand, Modi government has embarked upon a Unified Pension Scheme (UPS) to replace the National Pension Scheme (NPS) for its 23 lakh employees which has got latent motive of removing the dissatisfaction amongst the crores of employees in the states especially BJP ruled state which may immediately adopt it in near future. Maharashtra was quick to adopt it and the ruling coalition expects political gain in the polls though it may be too late. Centre had substituted OPS in 2003 during the Vajpayee regime which was implemented by majority of the states but opposed by employees of Congress ruled states.
Prime Minister Narendra Modi said UPS ensures dignity and financial security for government employees, which is consonance with the government's commitment to protect their interests and secure their future. The PM expressed his opinion on X (Twitter) and said "We are proud of the hard work of all government employees who contribute significantly to national progress. The Unified Pension Scheme ensures dignity and financial security for government employees, aligning with our commitment to their well-being and a secure future,"
Interestingly, Congress president, Malik Arjun Kharge did take a dig at the announcement of UPS by the Modi government but could not reject it when he said on X (Twitter) “U in UPS stands for U turns of the Modi government.” Congress spokesman said that this job ought to have been done earlier and it is being done under pressure now. The central government employees should get pension based on their salary prior to retirement and not just 50 % of their salary and instead they should get 100% of their salary.
In a related development, central government employees leaders said that the issue should not be politicised and urged states to implement UPS. They, however, said that OPS was still the best option as it did not require employees to contribute but we should be practical and ponder over the best option provided by government. The Maharashtra government became the first BJP ruled state to switch over to UPS and offered the new scheme which will be applicable from April 1, 2025.
Top officials in the NDA government say that the UPS is designed to integrate the strengths of the OPS with the sustainability and flexibility of the National Pension Scheme (NPS), offering a modernized approach to retirement benefits that balances financial responsibility and security. According to government data, outstanding pension liabilities of as many as 28 states rose by over 43% in the three years from March 2020 to March 2023 which has become worrisome for the union government as it may lead to economic distress in future.
Political observers say that after Maharashtra, it was turn of Haryana but promulgation of code of model conduct has acted as a hindrance to BJP’s plan to regain some ground in the state. It could have countered Congress party’s repeated stand of restoration of OPS which had been done by previous party’s governments in Rajasthan and Chhattisgarh to garner the support of employees but failed to stop BJP from coming to power in both states. Contrary to it, OPS promise had yielded political dividends in Himachal as employees were predominantly responsible for the defeat of BJP but it has led to fiscal crisis in this hilly state. In a sequence, centre has stopped Rs 9,000 crore which were contributed by state government a share of OPS between 2003 and 2023.An identical situation prevailed in Rajasthan also as previous Gehlot government was in dock over its demand of claiming Rs 37,000 crores which pertained to its share hence request was turned down by the centre which wanted state to implement NPS.
Financial experts say that according to an article published in the bulletin of Reserve Bank of India, it was made crystal clear that states reverting to OPS may face unsustainable fiscal stress. The cumulative effect of OPS could be 4.5 times higher than NPS with an additional burden of 0.9% of GDP annually by 2060. The authors had highlighted that while OPS may be more attractive to employees, it puts a significant financial burden on the government, unlike NPS, which aims at ensuring good pensions while reducing the budgetary burden. As per research conducted 23 years back, India’s implied pension debt of centre and states coupled with funding gap of the pension scheme was bound to reach unmanageable and unsustainable levels which may spell doom for the growing economy of the country in future. The prominent economists are vehemently opposed to OPS as it will have a cascading effect on the health of the economy in future. Montek Ahluwalia, former deputy chairman of the now-scrapped planning commission described the move by some state governments to implement OPS as absurd as it will prove a recipe for bankruptcy.
As per official data, pension liabilities of the states’ account for 2.1% of the total expenditures and it rose by 8.9 % which is expected to grow unhindered in future. It is likely to go up to 7.98 % by 2040 because it has already witnessed an increase of 15.90% from 2014 to 2019.The union government had earlier informed the parliament that over 2.54 lakh crores were spent on pension liabilities of 70 lakh central employees during 2021-22 which will attain an upward trend with every passing year. States burden will be more than RS 1.56 lakh crores per annum if OPS is implemented by them. The rising pension costs at both the central and state levels highlighted the urgent need for sustainable pension reforms. Without such reforms, the growing pension burden could pose a challenge to fiscal stability, diverting resources from other critical areas of public spending. As of the fiscal year 2023-24, the pension bills for both the Centre and the states have become a significant component of their committed expenditures.
Future Implications
For the fiscal year 2024-25, the estimated pension bills for both the Central Government and state governments are significant, reflecting a growing financial burden on public finances. The estimated pension bill for the Central Government is projected to be around ₹2.53 lakh crore for 2024-25. This includes pensions for retired civil servants, defence personnel, and other categories.
For the state governments, the combined estimated pension bill is expected to be approximately ₹5.73 lakh crore in 2024-25. This represents a considerable portion of the states' budgets, with some states like Uttar Pradesh, Maharashtra, and West Bengal shouldering particularly large pension liabilities. Trends and Concerns exhibit that the rising pension burden has been a cause for concern as it limits fiscal space for development and welfare spending. The CAG has highlighted the need for states and the central government to consider pension reforms, such as a shift from defined benefit to defined contribution schemes, to manage these escalating costs.
Experts say that a cursory look at over the past three decades, pension liabilities for both the Centre and states have shown that there has been a significant surge in the burden thereby affecting developmental works. In 1990-91, the Centre’s pension expenditure stood at Rs 3,272 crore, while the combined outgo for all states was Rs 3,131 crore. By 2020-21, the Centre's pension bill had skyrocketed 58-fold to Rs 1, 90,886 crore, and for states, it had escalated 125 times to Rs 3, 86,001 crore. Within this 30-year period, the total pension bill for states alone has surged from Rs 3,131 crore in 1990-91 to Rs 3, 86,001 crore in 2020-21.
The estimated pension bill for the Central Government is projected to be around ₹2.53 lakh crore for 2024-25. This includes pensions for retired civil servants, defence personnel, and other categories. State Governments. For the state governments, the combined estimated pension bill is expected to be approximately ₹5.73 lakh crore in 2024-25. This represents a considerable portion of the states' budgets, with some states like Uttar Pradesh, Maharashtra, and West Bengal shouldering particularly large pension liabilities.
Comparison between Unified Pension Scheme (UPS) and the Old Pension Scheme (OPS):
Unified Pension Scheme (UPS): The Unified Pension Scheme introduces a contributory model where both the employees and the government contribute to the pension fund. The UPS revises the government’s pension contribution, increasing it to 18.5% of basic pay, up from the previous 14%, while the employee's share remains steady at 10% as in NPS. This change is designed to bridge the gap between the guaranteed 50% pension and the returns generated by the pension fund. The initial implementation of the UPS is projected to cost the government around ₹6,250 crore in the first year, along with an additional ₹800 crore to settle arrears for employees who retired after the NPS was introduced in 2004. The UPS also ensures a defined pension, family pension, and a minimum pension for those who fall short of the required service period for a full pension, providing greater stability and security for government employees. The UPS offers an assured pension amount, similar to the OPS, but this is based on the contributions made by both the employee and the government over the years. The assured pension provides a sense of security to retirees, as they are guaranteed a minimum pension amount, despite the contributory nature of the scheme. Additional Benefits: The UPS includes several additional benefits to enhance the overall retirement security of employees. These benefits include: Guaranteed Family Pension: In the event of the pensioner’s death, their family is assured a pension, ensuring continued financial support. A guaranteed minimum pension is set, ensuring that all retirees receive at least a basic level of income, even if their contributions were minimal. Pensions are adjusted for inflation, helping to maintain the purchasing power of the pension over time and protecting retirees from the eroding effects of rising prices.
The latest data on pension expenditures reveal that both the central and state governments in India are grappling with substantial financial commitments. For the fiscal year 2023-24, the central government’s pension bill was projected to reach approximately ₹2.39 lakh crore. This amount encompasses pensions for retired government employees, defence personnel, and other beneficiaries, underscoring the significant financial responsibility borne by the central government. State governments are also facing heavy pension liabilities. For instance, Maharashtra’s pension bill for 2023-24 is anticipated to be around ₹45,000 crore, while Uttar Pradesh’s pension expenditure is expected to approach ₹50,000 crore. These figures reflect the escalating financial strain of pension obligations on state budgets as well.
Old Pension Scheme (OPS): Non-Contributory: Under the Old Pension Scheme, employees are not required to contribute any portion of their salary toward their pension. The entire responsibility for funding the pension lies with the government. This means that employees receive a pension based solely on the government's provisions, without any direct financial input from their side during their working years. Unfunded Liability: The OPS is an unfunded scheme, meaning the government bears the full pension liability. There is no dedicated fund or investment that supports these pensions; instead, the pensions are paid directly from the government’s revenue. This creates a significant financial burden on the government, especially as the number of retirees grows. Fixed Pension: Pensions under the OPS are calculated based on the last drawn salary, typically set at 50% of the last basic pay. This ensures that retirees receive a stable income post-retirement, directly proportional to their final earnings. The fixed nature of the pension provides predictability and financial security to retirees. No Market Risk: The amount of pension received under the OPS is not influenced by market fluctuations or economic conditions. This guarantees that retirees receive a consistent and predictable pension amount, protecting them from the volatility of financial markets.
Trends and Concerns:
The rising pension burden has been a cause for concern as it limits fiscal space for development and welfare spending. The CAG has highlighted the need for states and the central government to consider pension reforms, such as a shift from defined benefit to defined contribution schemes, to manage these escalating costs which is reflected in new UPS.
(Writer is political analyst and strategic affairs columnist based in Shimla)
