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RBI Warns States Against Implementing the Old Pension Scheme

Reserve Bank of India cautions states against implementing the old pension scheme as many states announce their decision to revert to it.

Aarushi Chadha
RBI
According to the SBI research report, the Old Pension Scheme is an attractive dispensation for most political parties because young people can benefit from it even though they may not have contributed to the pension committee

As Himachal Pradesh becomes the latest state to announce its decision to revert back to the old pension scheme, the Reserve Bank of India shared its concern about the revision and how it can result in the accumulation of unfunded liabilities in the future. The governments of Rajasthan, Chhattisgarh, and Jharkhand have recently informed their decision to restart OPS to the Centre and the Pension Fund Regulatory and Development Authority.

Before we get into RBI’s reasoning against the implementation of OPS, let’s take a look at the major differences between Old Pension Scheme and New Pension Scheme.

OPS Vs NPS

Factors of Differentiation

OPS

NPS

Who can avail?

Only government employees can avail Old Pension Scheme.

Any Indian Citizen between the ages of 18 to 65 years can avail of the New Pension Scheme.

Nature

Retired government employees receive 50% of the last drawn salary as a monthly pension.

NPS is a contributory pension scheme. Employees contribute 10% of their salary and the government contributes 14%. Under the NPS, the pensioner will receive 60% of their pension in a lump sum and the other 40% is meant to be invested in annuities in order to receive a monthly pension.

Tax Benefits

There are no tax benefits on OPS.

Employees can claim a tax deduction of 1.5 lakhs under section 80C of income tax.

Switching Schemes

OPS scheme can be switched to NPS.

Although the general public is not allowed to switch from NPS to OPS, however, central government employees have the option to switch in case of death or disablement of the employee.

Choice of Investing

No choice

NPS allows to invest in three types of funds- safe (allows 10% investment in equity), balanced (up to 30% in equity), and aggressive (up to 50% in equity).

Why is RBI cautioning states against switching back to OPS?

The Reserve Bank of India claims that the Old Pension Scheme increased the government’s liabilities as it puts the burden of paying employees their pension on the states, which risks financial security. On the other hand, under the New Pension Scheme, the pension is market-linked and involves contributions from employees, employers, and the government.

In a report titled ‘State Finances: A Study of Budgets of 2022-23, the RBI noted, “A major risk looming large on the sub-national fiscal horizon is the likely reversion to the old pension scheme by some states. The annual saving in fiscal resources that this move entails is short-lived. By postponing the current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years.”

Many states have found it convenient to pay old pensioners with the money collected from the current employees, however, OPS is fiscally unsustainable and many state governments are left without money to fund it because OPS has no accumulated funds or stock of savings to fulfill pension obligations.

Last November, a federation of Union government employees union had written to the cabinet saying that NPS is a “disaster for retired employees.” The letter also cited examples of officials who had switched to the NPS but were not receiving their promised pension amounts. For instance, “Under the NPS, the official with a basic pay of Rs 30,500 received Rs 2,417 as monthly pension as against the Rs 15,250 pension he would have been given under the OPS.”

According to the SBI research report, the Old Pension Scheme is an attractive dispensation for most political parties because young people can benefit from it even though they may not have contributed to the pension committee.

The RBI also stated that as per the budget estimates for 2022-23, states are expected to incur a 16 % rise in pension expenditure at Rs 463,436 crore in 2022-23 as opposed to Rs 399,813 crore in the previous year. The State Bank of India also reported that the cumulative annual growth rate for pension liabilities was 34% for all state governments during the last 12 years ending in the financial year 2022.

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