Look beyond politics on pension scheme

Last week, Punjab reverted to the old pension scheme (OPS), joining other states governed by parties opposed to the Bharatiya Janata Party (BJP) in rejecting the new pension scheme (NPS). Other states such as Jharkhand, Chhattisgarh and Rajasthan have already decided to revert to OPS, hoping that it will placate government employees. OPS guaranteed inflation and pay commission indexed pension payouts without any contribution from the employee. NPS, on the other hand, is built on employee and employer contribution and the returns are market-based. It is obvious that OPS is more generous. But is it feasible, given that there’s no indication the impact of reverting to it was rigorously studied? As this newspaper has noted before, data shows pension payouts form a quarter of the states’ revenues (and more than half of the tax revenues in states such as Bihar and Uttarakhand). Once the NPS cohort started retiring, policymakers expected this burden to ease. But if more states continue to ditch the NPS bandwagon, it will translate into steeper pension bills. This is a fiscally unsustainable situation.

Government employees form a minuscule but vocal section of the population, with the power to influence an electoral campaign. It is unfortunate that political compulsions are precipitating short-term thinking that may hurt the government in the long term. But it is an equally telling commentary on the state of India’s federal compact that a key piece of pension reform that was pushed by two successive governments of distinct ideologies (the National Democratic Alliance and then the United Progressive Alliance) is under stress today. It’s important not to let politics come in the way of prudent fiscal policy.