Many state and central government employees are against the national pension scheme (NPS) and want to restore the old pension scheme. Some state governments have also reverted to the old pension scheme. Unfortunately, this is financially unsustainable.
Take, for instance, the DA announcement on Sept 28th 2022. “The additional financial implications on account of this increase of Dearness Allowance to Central Government employees are estimated at Rs.6,591.36 crore per annum; Rs.4,394.24 crore in the financial year 2022-23 (i.e. for a period of 8 months from July 2022 to February 2023)”.
“The additional financial implications on account of this increase of Dearness Relief to pensioners are estimated at Rs.6,261.20 crore per annum; and Rs.4,174.12 crore in the financial year 2022-23 (i.e. for a period of 8 months from July 2022 to February 2023).”
Notice that the amount of DA paid to govt pensioners is almost equal to that paid out to active employees! With better health care, life expectancy has increased, so the pensioner’s DA will not decrease anytime soon.
My mother retired 20 years ago and started receiving a pension indexed to inflation. Not only did it increase twice a year, thanks to DA hikes, but it also increased due to pay commissions. The average year-on-year growth of her pension is close to 13%. This is an astounding number – not for her but for the government, which has to pay a similar pension to the lakhs of central and state pensioners.
Paying a pension that tries to keep pace with inflation or an indexed pension is a debt trap for the government. The projected strain on our fiscal deficit was alarming. Hence the government decided to stop defined-benefit pension schemes that offered indexed pensions and moved over to a defined-contribution pension – the national pension system (NPS), also known as the new pension scheme.
In a way, a retiree receiving an indexed pension is a government employee for life. The NPS seeks to sever ties with the employee post-retirement. Here are some facts that gave birth to the NPS.
In 1998, the Committee for Old Age Social and Income Security (OASIS) was set up. It noted that the population of the 60+ age group is expected to increase by ~ 107% between 1991 and 2016. Senior citizens represent 9-10% of our population today, which is expected to grow to13.3% by 2026. The life expectancy after normal retirement at 60 is expected to be at least 15-20 years.
According to 1991 census data, only 11% of the total workforce is eligible to subscribe to a pension scheme! The fear that most of them would not have retirement savings is the main reason for the introduction of the NPS Swavalamban Yojana for the unorganised sector.
Even if one assumed no increase in government employment after 1992 (true in many areas), the pension expenditure for the central government would increase from Rs. 35,690 million in 1995 to Rs. 2,71,830 million in 2015. A CAGR of ~ 17.5%!
The 7th Pay Commission report notes that
the total pension liability on account of Central Government employees had risen from 0.6 percent of GDP (at constant prices) in 1993-94 to 1.66 percent of GDP (at constant prices) in 2002-03. Pension expenditure of the Central Government grew at a compound annual growth rate (CAGR) of 21 percent during the period 1990 to 2001
The tax burden on the state government is also similar, as noted here.
A CRISIL report notes that the pension burden for the government is expected to remain close to 2.2% of the GDP between 2015 and 2030 and only then decrease to about 0.7% ~ 2050.
These are the manifestation of the negative power of compounding in the number of 60+citizens, life expectancy due to an increase in technology and health consciousness and, of course, the burden to the government that has to pay an indexed pension.
Therefore paying inflation-indexed pensions to government employees is unsustainable. How will state governments foot the additional expenditure? It will have to be done via bonds and central government borrowing. In June 2022, The RBI has noted that fiscal health of several states like Bihar, Kerala, Punjab, Rajasthan and WB is already in poor shape. It again reiterated the message in Jan 2023: Reverting to old pension scheme poses big financial risk, RBI warns States.
According to the RBI’s risk analysis of state finances: “The slowdown in own tax revenue, a high share of committed expenditure and rising subsidy burden have stretched state government finances exacerbated by COVID-19. For the five most indebted states, the debt stock is no longer sustainable, as the debt growth has outpaced their GSDP growth in the last five years”.
“New sources of risks have emerged – the relaunch of the old pension scheme by some states; rising expenditure on non-merit freebies; expanding contingent liabilities; and the ballooning overdue of DISCOMs – warranting strategic corrective measures. Stress tests show that the fiscal conditions of the most indebted state governments are expected to deteriorate further, with their debt-GSDP ratio likely to remain above 35 per cent in 2026-27″.
The old pension scheme is thus a recipe for financial and economic disaster. Indian citizens, especially government employees, should realise that the government will not help us or save us! We have to do that ourselves via proper retirement planning!
Update: Cash-strapped AP government delays payment of pensions.
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