A Reserve Bank of India (RBI) study has warned against the revival of the Old Pension Scheme (OPS) by certain states in India, saying that such a move would compromise the interest of the future generations of Indians.
According to the study, which was published on September 18, 2023, a shift back to OPS would impose a financial burden of four-and-a-half times on the government as compared to the existing National Pension System (NPS).
Background And RBI Study
In the early 2000s, India introduced pension reforms that led most state governments to adopt the NPS, which is a defined pension contribution scheme. However, several states, namely Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh had announced they would return to OPS for the state government employees.
The RBI conducted the study in this context to assess the potential fiscal costs in light of the contribution to the NPS contribution by the state government employees.
According to the study, while reverting to OPS may yield short-term reductions in state pension outgo, these savings will be dwarfed by huge rise in future unfunded pension liabilities in the long-run.
The burden of pensions under OPS is projected to exceed NPS contributions for most states by the 2030s. Under OPS, the estimated actual pension burden will increase by around four-and-a-half times of the estimated pension outgo under the NPS, with the additional OPS burden rising to 0.9 per cent of GDP annually by 2060, the report said.
Implications Of Reverting To OPS
The study warns that a shift back to OPS by Indian states would be a regressive move, undermining the benefits of past fiscal reforms. It comes at a time when most nations worldwide are transitioning toward defined contribution plans.
As global life expectancy is projected to rise (to reach 77.2 years in 2050 from 72.9 years in 2022), the elderly population is set to increase, exacerbating pension burdens. Also forecasting future pension outlays is complicated by factors such as fluctuating interest rates, increased longevity, and changes in salary and pension growth, all of which can raise risk premiums and the cost of capital.
Any reversion to OPS by states would be fiscally unsustainable and will be a major step backwards undermining the benefits of past fiscal reforms and compromising the interest of future generations, the report said.
Difference Between NPS And OPS
To better comprehend the context, let’s explore the fundamental distinctions between OPS and the NPS.
Old Pension Scheme (OPS): OPS guarantees monthly pensions for beneficiaries until their demise. The monthly pension amount will be half of an individual’s last drawn salary. Pension amount equals half of the individual’s last drawn salary. Pensioners receive the pension amount with this biannual revisions in Dearness Allowance (DA), so the pension increases semi-annually in line with the DA. OPS exclusively covers government employees.
National Pension System (NPS): NPS operates as a contributory pension plan. Employees contribute 10 per cent of their salary, with the government contributing 14 per cent to NPS accounts. Contributions are invested in a pension fund that contains diversified portfolio of government bills, bonds, shares, and debentures. Beneficiaries can withdraw 60 per cent of the invested amount upon retirement. At 60 years of age, the remaining 40 per cent must be used to purchase an annuity.