Reverting to old pension scheme fraught with fiscal risk, says RBI
NEW DELHI: Raising red flag on increasing pension expenditures, the Reserve Bank of India (RBI) in a recent report has warned states against going back to the older pension system, in which most of the financial burden is borne by the states.
In its monthly Bulletin of June 2022, the central bank says it has studied the finances of 10 most indebted states and points out that pension expenditure alone accounts for 12.4% (average of 2017-18 to 2021-22) of total revenue expenditure of these states. It has estimated that the pension outgo would continue to be in the range of 0.7-3.0% of gross state domestic product (GSDP) in the 10 most indebted states until 2030-31. These states are – Punjab, Haryana, Kerala, Madhya Pradesh, Andhra Pradesh, Uttar Pradesh, Bihar, Haryana, Rajasthan and Jharkhand.
Centre’s pension expenditure averages 5% of its revenue expenditure, while in terms of GDP it’s 0.8%.
The RBI in its report said the old pension system (defined benefits) had numerous drawbacks, particularly in terms of medium-term fiscal sustainability and the tax burden on future generations. Except West Bengal, most states had switched to the New Pension Scheme (NPS).
However, recently Rajasthan and Chhattisgarh have reversed back to the old pension system, which the RBI says has reignited the debate about the pros and cons of the scheme versus the NPS, with a few more states reportedly contemplating taking similar steps. “As the current state government retirees are primarily the beneficiaries of the old pension scheme, the immediate financial strain will not be felt if the states choose to revert to the old pension scheme,” notes RBI.