With state elections in the offing, vote banks are dictating political parties’ decision to revert to the erstwhile pension regime
When Punjab chief minister Bhagwant Mann tweeted that his government was considering returning to the Old Pension System (OPS) on September 19, it rekindled a fresh debate over the financial feasibility of the system over the National Pension System (NPS).
India’s executive director to International Monetary Fund and former chief economic adviser K V Subramanian tweeted that already fiscally stressed states like Punjab can ill afford to revert to the OPS.
Old pension system is defined BENEFIT (not defined CONTRIBUTION) system. If California got into fiscal problems inter alia bcos of defined benefit pensions, already fiscally stressed states like Punjab can ILL AFFORD this. Unequivocally, #RecklessPopulism that shud be denounced! https://t.co/ly4lzt2Tr0
States like Rajasthan and Chhattisgarh recently announced that they would be reverting to OPS for government employees for 2022-2023. This announcement by the three states comes at a time when the debate is rife over state finances and populist schemes.
The Supreme Court recently observed that ‘freebies’ were terrible for the country and asked the Centre, states, and other stakeholders to form a body to investigate this debate. The Reserve Bank of India, too, flagged five financially profligate states, including Rajasthan and Punjab, in a report, adding that their fiscal conditions were showing warning signs of building stress.
Given this backdrop, it is unsurprising that the latest debate over the two pension systems seems to have caused sharp divisions between naysayers and those in favour.
The Difference Between OPS And NPS
The fundamental difference between the two regimes is that OPS gives assured benefits, while under NPS, contributions from employers and employees are defined.
The Atal Bihari Vajpayee-led central government replaced the OPS in December 2003 with NPS, which came into effect on April 1, 2004. Under the OPS, pension was computed at 50 per cent of the last salary an employee was entitled to and the government paid the whole amount. The OPS income was not taxable and the employee was entitled to inflation-linked dearness relief every six months.
NPS is a contributory pension scheme where the employees contribute 10 per cent of the salary and dearness allowance, with the government contributing 14 per cent. The total fund is deposited with the pension regulator Pension Fund Regulatory and Development Authority (PFRDA). These funds are then invested in the equity or debt market, depending on what an employee chooses and the prevailing guidelines.
Under NPS, an employee is entitled to claim a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961 along with an additional deduction of Rs 50,000 for investments under 80CCD (1b).
Regimes Followed By Different States
Central government service employees who joined administrative services on or after January 1, 2004, currently fall under the ambit of NPS. Post its introduction, all states, except West Bengal, had accepted NPS. This includes Rajasthan, Punjab and Chhattisgarh, which opted for it eighteen years ago.
While Punjab has intended to opt for OPS, Rajasthan and Chhattisgarh have already returned to this regime. In poll-bound Gujarat, Congress has promised voters that it would go back to OPS if voted to power. Delhi chief minister and Aam Aadmi Party (AAP)’s national convener Arvind Kejriwal, too, promised the same to voters in an election campaign in the state’s Vadodara.
Ashok Ghelot, chief minister of Rajasthan, recently said Andhra Pradesh, Assam, and Kerala governments have also set up committees to look into the OPS.
It is not just opposition-ruled states that are re-looking NPS. The BJP-ruled Himachal Pradesh also set to go for its state elections this year, is witnessing widespread protests to revert to OPS.
The New Pension Scheme Karamchari Mahasangh (NPSKM), which is currently holding a relay hunger strike in Shimla, plans to intensify its agitation for the restoration of the OPS in Himachal Pradesh. Following these protests, the state government set up a committee headed by chief secretary Ram Subagh Singh to restore OPS. Madhya Pradesh, too has witnessed similar protests for restoring OPS.
Is It Financially Viable?
A key reason for moving to NPS was to lessen the financial burden that OPS imposed on the government exchequer. State and Centre governments were presumed to have concluded that the old system was becoming financially difficult for their administration to bear.
However, it is understandable why an employee’s perspective would consider the OPS a more viable offering because of the rising inflation and prevalent uncertainty around financial markets. Fixed returns are more coveted than fluctuating ones in an uncertain economic environment.
It is worth noting that states with a high share of salary and pension expenditure might find it challenging to take on the burden of fixed pension outflow. Punjab’s projected pension outlay during 2022-23 is Rs 15,146 crore. This accounts for almost one-third of Punjab’s tax revenues (OTR) of Rs 45,588 crore.
After adding expenses like interest and salary payments, the total expense for FY23 would be Rs 66,440 crore, exceeding the state’s OTR by around 46 per cent. This year, its outstanding liability is expected to be 48.5 per cent of the state’s gross state domestic product (GSDP).
Gujarat is financially in a less precarious situation than Punjab. Its 2022-23 pension outgo is projected to be 17,590 crore, accounting for 15.31 per cent of its OTR, which is Rs 1.15 lakh crore. Adding committed expenses like interest and salary payout, the total expense is projected to be Rs 82,731 crore, accounting for 72 per cent of its OTR. Its outstanding liability is projected to be about 16 per cent of this year’s GSDP.
Who Stands To Gain Politically?
As AAP’s national ambitions sharpen with its foray into states beyond Delhi, its eyes are set on the upcoming Gujarat elections. The National Movement for Old Pension Scheme (NMOPS) is the umbrella body leading agitations across states to restore OPS. It said that in Gujarat and Himachal Pradesh assembly elections, it would politically support the party that delivers OPS to the state.
This considerably explains AAP’s quick move to restore OPS in Punjab. Since AAP is also in power in Punjab, successfully re-implementing OPS in the state would help the party move closer to its ambition of becoming a national party