States switch to old pension scheme Major step back: RBI article

Recently some states have announced reversion to OPS from NPS. (representative)


States reverting to the old pension scheme is a “major step back” and could bring states’ fiscal stress to “unsustainable levels” in the medium to long term, according to a paper by RBI staff.

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

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 have announced reversion to OPS from NPS, the article said.

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

“… short-term reduction in states’ pension spending, which may be the driving force behind decisions to restore OPS, would be overshadowed by the huge increase in future unfunded pension liabilities over the long term,” it said.

“States’ return to OPS would be a major step backward and could increase their fiscal stress to unsustainable levels in the medium to long term,” the article warned.

The immediate benefit for states switching back to OPS is that they will not have to spend on the NPS contribution of the current employees, but in future the unfunded OPS is likely to put “severe pressure” on their finances, it said.

States would save only 0.1 percent of GDP in annual pension costs by returning to OPS until 2040, but would be required to incur an average additional increase in pension costs of 0.5 percent of annual GDP after 2040.

It said that several developed economies with DB schemes in the past have faced rising public expenditure due to the rising life expectancy of citizens, and the changing demographic profile and rising tax costs have forced several economies around the world to reassess their pension schemes.

“Any return to OPS by the states would be fiscally unsustainable, even though it could result in an immediate decrease in their pension costs,” the article said.

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

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