States should resist reverting to old pension scheme

Reversing the pension reforms for politics of populism may lead to fiscal hara-kiri in the long run, and the states must resist any such move. Recently Rajasthan and Chhattisgarh—both Congress-ruled states—have decided to reinstate the old pension system of defined benefit plan, where the employer (state governments in these cases) guarantees the employee an income post-retirement. The cost of the pension is mostly borne by the employer.

Previously, these states were following the ‘new’ pension system that came into existence in 2004. As per that scheme, the pension that an employee receives depends on her own contribution made towards a retirement fund during her years of employment. Going back to the old scheme would be fiscally unviable in the long run given the demographic changes that the country is witnessing. India’s fertility rate is now 2.0 as per the latest National Family Health Survey. This means the size of the old and pension earning population would increase gradually.

With the life expectancy in India now reaching 70 years, people living on pension income would go on to live longer. If the state governments decide to bear a majority of this burden, they may end up in a fiscal hole in the future. A recent report by the State Bank of India puts the numbers in perspective. It says that pension liabilities of all states have grown at an annual rate of 34% over the past 12 years, while the pension outgo is around 13.2% of revenue receipt for all states combined and 29.7% of their own tax revenue as on 2020–21. These are alarming numbers despite the fact that, barring Tamil Nadu and West Bengal, all states had shifted to the defined contribution system of pension.

Rajasthan, which has reverted to the old system, already has pension liabilities that are 30% of its tax revenue and 13% of its total receipts in 2021–22. An analysis by this newspaper earlier says that despite Kerala shifting to the New Pension System in 2013, the state’s pension liabilities are ballooning. Kerala’s pension liabilities are 46% of its tax revenues and 21% of its total receipts. As the chorus for reverting to the old pension system grows louder, the Centre and states must resist bowing to such demands for the greater good.

Source: New Indian Express

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