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States shift to old pension scheme, major step backward: RBI article

Recently, some states have announced the reversal of NPS to OPS. (Representative)


States’ return to the old pension regime constitutes a “major step backwards” and could take states’ fiscal pressure to “unsustainable levels” in the medium to long term, according to an article written by RBI staff.

The article by Rachit Solanki, Somnath Sharma, RK Sinha, SR Behera and Atri Mukherjee states that the cumulative tax burden in the case of the old pension scheme (OPS) could reach 4.5 times that of the new pension scheme, which was implemented. more than ten years ago as part of the pension reform.

The views expressed in the research paper are not those of the Reserve Bank of India (RBI).

Recently, Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh announced the reversal of NPS to OPS, the report said.

FPO has defined benefit (DB) while NPS has defined contributions, the article said, adding that while FPO has short-term appeal, it also poses challenges in the medium to long term.

“…the short-term reduction in state pension spending, which could motivate OPS reinstatement decisions, would be dwarfed by the enormous increase in future long-term unfunded pension liabilities,” he said. declared.

“Returning states to OPS would constitute a major step backwards and could increase their budgetary pressure to unsustainable levels in the medium and long term,” the article warns.

The immediate gain for states returning to OPS is that they will not have to spend on the NPS contribution of current employees, but in the future the unfunded OPS will likely put “great pressure” on their finances, he said.

States will save only 0.1 percent of GDP in annual pension spending by returning to OPS through 2040, but would be required to suffer an additional average pension spending increase of 0.5 percent of annual GDP after 2040.

It states that several developed economies with defined benefit schemes in the past have faced increased public spending due to the increased life expectancy of their citizens, and that changing demographic profiles and the Rising fiscal costs have forced several economies around the world to reexamine their pension systems.

“Any return by states to OPS would be fiscally unsustainable, even if it could lead to an immediate reduction in their retirement spending,” the article states.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)


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