Elections in key states are round the corner and a pitch for switching back to India’s old system of state pensions is growing louder. Himachal Pradesh state Congress chief Pratibha Singh recently promised that the party will bring back a defined-benefits package within 10 days if voted to power, echoing a promise party leader Rahul Gandhi made in Gujarat, another state headed for polls. And it isn’t just the Congress. The Aam Aadmi Party also has a switch-back on its agenda, while the Samajwadi Party too has made its stance clear by criticizing the ruling Bharatiya Janata Party (BJP) for moving government employees to a contribution-based National Pension System (NPS) in 2004. Chhattisgarh, Jharkhand and Rajasthan have already reverted and Punjab is headed back. These states have non-BJP governments, indicative of an opposition convergence on the issue to score political points. Financial commitments with bills due decades later are politically expedient to make, but such populism is also why fiscal reforms are so difficult. And why we should not slide back from hard-won gains on a key aspect of fiscal rectitude: We must not overburden future generations that are in no position to offer their ballot consent. Pensions involve payments so far off that they’re a perfect test case.
On 1 January 2004, central and state government pensions were moved to the NPS, which acts like a retirement fund, promising to pay back a monthly pension that will depend on how large the corpus swells with pre-defined sums chipped in by workers during their work life (and by employers). Like any long-range investment scheme, this is a harder sell than the old assurance of a definite chunk of one’s last- drawn salary, enlarged routinely for inflation, until one’s last breath—a fixed payout. Workers naturally place a higher premium on income certainty the more they reckon they’ll need it for old age. But offering this certainty can turn exorbitant for a government. Over the decades, as state enrolment in India expanded and life spans increased, a bloated budget for employee transfers began eating into other outlays. In any case, everyone else had to invest for old age, as private jobs rarely had an equivalent privilege of open-ended transfers over a lifetime. So a fair long-term solution lay in a slow shift that would relieve future budgets of pension payouts and instead have workers (and the state) put money into a savings scheme meant for payback later.
Moving back could cripple the finances of states already reeling under heavy pension obligations. A State Bank of India research report estimated the total committed expenditures of states at 125% of their own revenue receipts in 2020-21, with pensions a big proportion for many. Poorer states can afford budget payouts even less, especially since they have other pressing uses for public money. We must all acknowledge that government employment has been far too generous a deal for too long in a country of limited means. Also, that defined benefits are fiscally unsustainable. We need a political consensus on this, a compact not to commit funds that future administrations may want to deploy in other ways. Inter-generational equity is an important ethic in public finance. All states, therefore, should shun populism and go with the NPS option. Not only is it fiscally sensible, it puts employees of the private and public sector on an equal footing. Most of us invest as we go along—in the hope that what we put away is enough to cover our post-work-life financial needs. It should be the same for all.
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