“Future burden of OPS outgo will eclipse short-run gains for state coffers”
With some states reverting to the non-contributory Old Penson Scheme (OPS) from the National Pension System (NPS) for their staff, a Reserve Bank of India (RBI) paper on Monday warned that the fiscal cost of OPS could be as high as 4.5 times that of the NPS, in the event of all the states switching to OPS.
The RBI Study validates the findings of the recent studies that the expected cumulative pension burden for the States over the period from 2023 to 2084 due to the OPS, is substantially higher than that of the NPS.
“The Study finds that if there is a shift to the OPS scheme in 2023, the additional pension burden will start mounting in the subsequent years and outpace the NPS contribution for most of the states by the 2030s. Eventually, the fiscal cost of reverting to OPS will be enormous as the actual pension burden will increase by around 4.5 times than that of the NPS,” according to the paper authored by Rachit Solanki, Somnath Sharma, R. K. Sinha, Samir Ranjan Behera and Atri Mukherjee. This paper was prepared under the guidance of Deputy Governor Michael Debabrata Patra.
After the Centre rolled out the contributory NPS scheme for its new staff in 2004, most states followed suit and joined the scheme. The move was a major fiscal reform in decades aimed at containing unsustainable pensionary expenditure.
Recently, a few states such as Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh have announced a return to the OPS from NPS. The immediate gain is that they will not have to spend on the NPS contribution of the current employees (equal to 10-14% of their salary). Employees contribute another 10% of their salary.
In an OPS plan, benefits are defined in advance based on the employee’s final or average salary and those benefits are guaranteed by the government as the sponsor (up to 50% of the last salary drawn and annual inflation-linked increments). In contrast, NPS plans do not have a guarantee component. The pension benefits depend upon the market performance of the pension fund and the government’s cost is limited to a prespecified rate of contribution. The government has set up a panel headed by Finance Secretary TV Somanathan to suggest ways to increase pensionary benefits under NPS for the government staff without reverting to OPS.
In the counterfactual scenario of all state governments’ NPS subscribers being allowed to revert to OPS beginning in 2023, the State governments save upon the employer’s contribution. Consequently, States’ immediate outgo towards these employees will drop to zero. However, as these employees gradually retire, the States’ outgo will begin to increase again as these employees will now draw pensions in line with the older OPS beneficiaries, the RBI paper said.
By the mid-2030s the additional outgo would compare significantly to what it would have been under the NPS and eventually exceed it by 2040. Thereafter, the additional burden will increase rapidly, reaching around 0.9% of GDP annually by the early 2060s. This additional burden will be on top of the pension burden of older OPS retirees who will also continue to receive pensions until the 2060s.
“For the States, while reverting to OPS may look lucrative in the short-run, the future burden of OPS outgo will eclipse the short-run gains,” the authors cautioned. By reverting to OPS, the States’ will only save 0.1 per cent of GDP on an average in yearly pension outgo till 2040 but would be required to incur an average additional increase in pension expenditure by 0.5 per cent of yearly GDP post-2040.
The projected outgo increase of 0.9% of GDP annually by 2060 is only a scenario with an assumed nominal GDP growth of 10%. The burden will rise even further in case of moderation in future growth. For instance, a 1 percentage point fall in average GDP growth rate raises the outgo from 0.9% to 1.3% of GDP by the early 2060s. A two percentage point fall will raise it further to 1.9% of GDP, it added.
Source:financialexpress.com