After Himachal success, Congress plans to make old pension scheme a poll plank in other states too

The Congress party has found a new, populist plank in the old pension scheme (OPS) after its first assembly win since 2019 in Himachal Pradesh. The party, according to two leaders, is ready to offer the sop in other elections as well.

Decades after all states migrated to the National Pension System (NPS), the Congress-ruled states of Rajasthan and Chhattisgarh announced reverting to the old way of providing for pensions. The Aam Aadmi Party ruled Punjab has also announced the dumping of the new pension plan, which is essentially a “pay as you go” scheme.

While economists argue against going back to the OPS as a bad fiscal policy, Congress leaders argue that in many states, OPS is an issue and they are willing to promise this sop to voters.

On December 9, when asked about carrying forward the reforms related to the new pension scheme, party’s general secretary for communications Jairam Ramesh said, “The word reforms is a much-abused word. Anything and everything can get classified as reforms and then all conversation comes to a stop. This old pension scheme is a running demand for many years.”

The NPS was brought during Atal Bihari Vajpayee’s government and rolled out on January 1, 2004. When the Narendra Modi government came to power, it offered tax benefits on the scheme to make it popular.

At the heart of the old “pay as you go scheme”, operational till 2004, lay an intergenerational disparity, according to analysts. Under it, contributions from the current generation of workers were used to pay for pensions of current pensioners, making it an unfunded pension scheme because it represented a direct transfer of resources from the current generation of taxpayers to fund the pensions. This meant that the old system was fiscally ruinous, according to Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, the country’s largest lender.

What makes the OPS politically attractive is that it offers an assured benefit to the retiree, fixed at 50% of the last drawn basic pay. Also, like the salaries, pensions were also increased with hikes in dearness allowance, essentially to account for inflation.

“Any return to the old scheme will not be fiscally viable,” Ghosh said. According to Ghosh’s research, pension liabilities of state governments over the long term showed a sharp increase. The compounded annual growth in pension liabilities for the 12-year period ended 2021-22 was 34% for all state governments. As of 2020-21, the pension outgo as a percentage of revenue receipts stood at 13.2%, Ghosh said.

The OPS was a key promise of the Congress party in the Himachal Pradesh election. “The state has a large number of the government employees as public sector is the biggest source of employment in the state. In the election, OPS became a key issue,” a Congress leader said, seeking anonymity.

The party had tried to play the OPS card in the Uttarakhand election as well, but the Bharatiya Janata Party won. The Congress is eager to use the pension scheme as a plank in other elections as well. “It depends on the state leadership. We are fighting state elections now,” said Jairam when asked if it will be promised in other states too.

He added that “in Maharashtra, in districts of Nanded, Akola, Hingoli, Buldhana and Washim, the running theme in all these five districts was the old pension scheme,” underlining how it is relevant in other states.

When asked about the debate that OPS was not a scheme of fiscal prudence, Ramesh said, “The Congress party has taken a considered view. We made this pledge in Gujarat as well, we have made this pledge in Himachal. Whatever the individual views may be, it is the party view that predominates.”

“What is socially desirable over takes what is financially prudent. We have to find the resources. Was MGNREGA financially prudent? The greatest champions of MGNREGA today were the ones who were raising questions on the financial prudence of MGNREGA,” he added. Ramesh was referring to the Mahatma Gandhi National Rural Employment Guarantee Act, the central government’s flagship welfare programme that ensures 100 days of paid work to all poor rural households.

The “pay as you go” financing model also has a hidden long-run cost of promised pension obligations, Ghosh’s research said. This is known as “implicit public pension debt.”

Data from National Pension Trust shows there are 5.54 million contributing state-level employees as of February 2022. Assuming that all states migrate to the old scheme, with an entry-level age of 28 years and a 5% annual inflation, the current present value of the implicit pension liabilities is around 13% of gross domestic product. This is discounted by current government securities yield on 40-year securities.

India’s retirees will live longer lives due to higher life expectancy, which means they will draw pensions longer than before. By 2050, India’s population will be 1.64 billion, of which 320 million will be of 60 years of age or older.

A key metric, the old-age dependency ratio — defined as the number of persons 60 years and over per 100 persons of 15 to 59 years age — is expected to touch 23% by 2036, compared to the current 16%.

This was the key reason for bringing in the NPS, which was a defined contribution scheme. Twenty-seven states joined the scheme between 2003 and 2005. According to the NPS, the government offers a 14% matching contribution against the 10% monthly contribution of employees.