Bombay:
The Reserve Bank has warned of some states returning to the old pension scheme, saying it poses a major risk to the “sub-national fiscal horizon” and would result in an accumulation of unfunded liabilities in coming years for them.
The observations in the RBI report entitled ‘State Finances: A Study of Budgets of 2022-23’ come in the backdrop of Congress-ruled Himachal Pradesh becoming the latest state to announce a return to the Dearness Allowance (DA) linked Old Pension Scheme (OPS).
Earlier, the governments of Rajasthan, Chhattisgarh and Jharkhand informed the central government and the Pension Fund Regulatory and Development Authority (PFRDA) of their decision to restart the OPS for their employees.
The Government of Punjab had also issued a notice on 18 November 2022 regarding the implementation of the OPS for the employees of the state government currently covered by the NPS.
In 2004, the Union government introduced the National Pension System (NPS), a defined contribution pension scheme that replaces the old pension scheme.
“A major risk looming over the subnational budget horizon is the likely return to legacy pension plans by some states. The annual savings in fiscal resources that this move entails are short-lived,” the RBI report said.
By postponing current spending into the future, states risk accruing unfunded pension liabilities for years to come, according to the report.
Under the old pension scheme, employees receive a defined pension. On this basis, an employee is entitled to 50 percent of the last salary taken as a pension.
However, the amount of the pension is payable under the national pension scheme, which has been in force since 2004.
Several economists have also expressed concern about reverting to the OPS, saying it would strain state finances.
Former deputy chairman of the former planning commission, Montek Singh Ahluwalia, recently spoke out against bringing back the OPS, saying it is one of the biggest ‘revadis’.
For 2022-23, the RBI report said states have budgeted for an increase in revenue spending, led primarily by non-development spending such as pension and administrative services.
Budget allocations for medical, public health and natural disasters have been cut, while spending on housing has been increased.
Defined spending, including interest payments, administrative services and pensions, is expected to increase marginally from 2021-22 (RE), report says
(Except for the headline, this story has not been edited by DailyExpertNews staff and is being published from a syndicated feed.)
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