In 2023-24, the central and state governments had allocated Rs 2.3 lakh crore and Rs 5.2 lakh crore respectively for pensions.
In recent years, the multiparty consensus that had led to the ushering in of pension reforms in the 2000s appeared to have unravelled. Several state governments such as Rajasthan, Punjab, Himachal Pradesh and Chhattisgarh had announced a shift back to the old pension scheme, as the clamour against the new pension scheme by a small but vocal section of the electorate gained traction.
In response, the Union government announced in March 2023 the setting up of a committee to look into the entire gamut of issues, and suggest a way forward. On Saturday, a few months after the fractured result of the general election, and in the run-up to key assembly elections, the Union cabinet approved a new Unified Pension Scheme (UPS) for central government employees. While the scheme has incorporated elements from both the old and the new pension scheme, it has partially rolled back some of the more fiscally appealing, hard-won features of the National Pension System.
Under the unified pension scheme, government employees will receive a “defined benefit” — a pension equivalent to 50 per cent of their average basic pay drawn in the year prior to retirement. To finance this, there will also be a “defined contribution” — the government will now contribute 18.5 per cent of the basic salary of employees, up from 14 per cent, while employees will continue to contribute 10 per cent. So while this new scheme will be unlike the unfunded OPS, and may also benefit from greater clarity, assuring a “defined benefit”, a key feature of both the old pension scheme and the unified pension scheme raises the possibility of the fiscal burden on the government increasing as it will have to make up for any shortfalls.
The government has said that the new scheme will entail an additional outgo of Rs 6,250 crore in the first year, and Rs 800 crore as arrears for the employees who have retired since the introduction of NPS. The total outgo will increase further if state government employees are onboard — as of March 2023, NPS had 23.8 lakh central government subscribers, and 60.7 lakh state government subscribers.
The share of expenditure allocated towards pensions is already a sizeable portion of the budgets of Union and state governments. In 2023-24, the central and state governments had allocated Rs 2.3 lakh crore and Rs 5.2 lakh crore respectively for pensions. Put together, for all states and Union Territories, allocations to pension were estimated at 12 per cent of their revenue expenditure in 2023-24 — in the case of states like Himachal Pradesh, Kerala and Uttar Pradesh, it is much higher. A return to defined benefits, which essentially involves providing generous benefits to only a tiny section of the labour force, runs the risk of not just increasing the burden on the exchequer, but also further constraining the space for spending on other avenues.
