Relying to old pension scheme a step backwards, says RBI

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Relying to old pension scheme a step backwards, says RBI

States reversing to the old pension scheme is a major step backwards and may take the fiscal stress of states to 'unsustainable levels' in the medium to long term, according to an article by RBI staffers.

The article by Rachit Solanki, Somnath Sharma, RK Sinha, SR Behera and Atri Mukherjee, said the cumulative fiscal burden in the case of the Old Pension Scheme could be as high as 4.5 times that of the New Pension Scheme, which was implemented over a decade ago as part of pension reforms.

The views expressed in the research paper are not that of the Reserve Bank of India.

The articles say that Himachal Pradesh, Jharkhand, Rajasthan and Chhattisgarh have announced reversal to the OPS from NPS.

The OPS has Defined Benefits while the NPS has defined contributions, the article said, adding that while the OPS has a short term allure, the same poses difficulties in the medium to long term.

'Short run reduction in states' pension outgo which may be driving decisions to restore OPS would be eclipsed by the huge rise in future unfunded pension liabilities in the long run,' it said.

Reverting to the OPS would be a major step backwards and can increase their fiscal stress to unsustainable levels in the medium to long term.

The immediate gain for states Shifting back to the OPS is that they will not have to spend on the NPS contribution of current employees, but in the future, the unfunded OPS is likely to exert'severe pressures' on their finances.

States will save only 0.1 percent of GDP in yearly pensii outgo by reverting to the OPS until 2040, but would be required to incur an average additional rise in pension expenditure by 0.5 percent of yearly GDP after 2040.

The government notes that several developed economies with DB funds in the past have faced increasing public expenditure due to the rising life expectancy of its citizens, and the changing demographic profile and rising fiscal costs have compelled several economies worldwide to re-examine their pension plans.