OPS harmful in the long-run, says RBI

Amidst rising agitations over NPS and some states reverting back to the old pension system(OPS), the government committee on the National Pension system may come up with ways to strike a balance between offering some level of guaranteed pension under the new pension system and not financially weighing down the government coffers. 

Media reports suggest that it is possible to offer 35-40% guaranteed pension to employees by tinkering with the current structure of NPS, but the consequent cost will have to be shared by employees along with the government exchequer. However, the finer details of this are yet to be worked out. 

Currently, Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh follow the OPS regime, where a government employee gets 50% of their last-drawn salary as pension, provided they have completed 33 years of undivided service. Even those who have served anywhere between 10-33 years are eligible for a pension, albeit proportionally. Simply put, OPS depends on current taxpayers to fund retirees. Once the 

A recent RBI bulletin highlighted that the long-term financial damage of going back to OPS far outweighs the short-term lure of OPS. While OPS is a direct benefit scheme, which means the government guarantees the employee’s pension post their retirement, NPS is a defined contribution scheme. This means that there is no singular guarantor of the employee’s pension. 

The NPS norms stipulate that at least 40% of total pension corpus accumulated during an employee’s lifetime has to be invested in annuities for generating a regular payout. The contributions are further invested in various asset classes like equities, bonds, government bills, debentures and more. In short, the returns on an employee’s retirement fund are market-linked. 

While the employees pay 10% of their basic salary plus DA every month to this corpus, the government pays 14% of an employees basic salary plus dearness allowance.

Short-term benefit, long-term harm
The article suggests that the total fiscal burden of OPS on Indian states could be around 4.5X high compared to NPS by 2084. Moreover, its pressure could also cascade to become 0.9% of India’s annual GDP by 2060.

India’s expenditure on pensions accounted for 1.7% of its GDP in 2022-23. The figure has steadily risen from a mere 0.6% of the GDP in the early 1990s. 

For the states going back to OPS, the average savings in yearly pension outgo will only be a meager 0.1% of GDP till 2040. This is because these states will save on the monthly government contributions mandated under NPS. But post that, they will have to incur an increase in their pension expenditure by 0.5% of the yearly GDP.