UPS: SENSE & SENSIBILITY

As the govt embarks on a new pension scheme, what will be its fiscal implications?

- SAMREEN WANI & INDIVJAL DHASMANA

The Centre and states together spent about 9.6 trillion on the pension of their employees in 2023-24 (FY24, revised estimates), accounting for 3.3 per cent of India's gross domestic product (GDP). The proportion peaked at 3.8 per cent in the pandemic year of FY21 and fell to 3.3-3.4 per cent later. The average spending was 3.3 per cent in the decade beginning FY15.

Most of the burden was caused by the old pension system (OPS). Under the new pension system (NPS), effective for employees recruited from January 1, 2004 in central services, excluding the army, and most states, governments earmark only 14 per cent of their basic pay each year.

With their combined outgo topping₹5 trillion for the first time in FY24, the pension bill of states exceeded that of the Centre by more than 82,000 crore. States' spending was higher than the Centre's in the three financial years till FY24.

However, as a proportion of revenue receipts, the states' outgo was 4.2 percentage points lower than the Centre's in FY24. This has been the trend for a decade.

This analysis included defence and railway pensions while calculating the Centre's bill. Defence personnel are paid under OPS. Railway employees are paid from a separate fund.

OPS-NPS-UPS

The NPS was touted as the milestone pension reform to lessen the burden on the exchequer. However, government employees were aggrieved as they would not get assured pension linked to inflation, as was the case with OPS.