Recently, some states have announced that they will roll back the OPS of the NPS. (Representative)
Mumbai:
States reverting to the old pension scheme is a “major step backwards” and could push states’ fiscal pressures to “unsustainable levels” in the medium to long term, according to an article by RBI staffers.
The article by Rachit Solanki, Somnath Sharma, RK Sinha, SR Behera and Atri Mukherjee states that the cumulative budget burden in the case of the old pension scheme (OPS) could be as much as 4.5 times that of the new pension scheme , which was implemented. more than a decade ago as part of the 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 announced that they are reverting the NPS to the OPS, the article said.
The OPS has defined benefits (DB), while the NPS has defined contributions, the article said, adding that while the OPS has short-term appeal, it poses challenges in the medium to long term.
“…the short-term reduction in states’ pension spending, which may drive decisions to restore OPS, would be overshadowed in the long run by the massive increase in future unfunded pension liabilities,” it said report.
“Returning states to the OPS would be a major step backwards and could increase their fiscal pressures to unsustainable levels in the medium to long term,” the article warned.
The immediate benefit for states switching back to the OPS is that they will not have to spend on current employees’ NPS contributions, but in the future the unfunded OPS is likely to put “severe pressure” on their finances, the report said .
States will save only 0.1 percent of GDP in annual pension spending through 2040 by returning to the OPS, but would need to average an additional increase in pension spending of 0.5 percent of annual GDP after 2040.
It says that several developed economies with DB schemes have historically experienced rising government expenditure due to the rising life expectancy of their citizens, and that the changing demographic profile and rising budgetary costs have forced several economies around the world to close their pension schemes to re-examine.
“Any return to OPS by states would be fiscally unsustainable, although it could result in an immediate decline in their pension spending,” the article said.
(Except for the headline, this story has not been edited by DailyExpertNews staff and is published from a syndicated feed.)
