Why Rajasthan government’s decision to return to old pension scheme is a fiscal disaster

News: The government of Rajasthan has decided to switch back to the DPBS scheme.

What is the reason that the Rajasthan government chose the DPBS scheme?

As life expectancy increases and demographic transitions increase older people, the crisis of financing DPBS is increasing. Sure pensions to govt. employees recruited up to 2003 and four-armed forces personnel, which is payable 35 years later, is like borrowing from young children to pay for the future.

Given these factors, it becomes important to understand why the government of Rajasthan has taken this step.

Why these steps have been taken?

The first reason is the considerable physical pressure on the state government. They have to bear the financial burden of both expenditures on a defined pension and their contribution to NPS. For example in Rajasthan, number of pensioners is about 5.6 lakh, which is expected to increase by 30,000 every year. And NPS scheme has approximately 5.5 lakh employees.  So the government has spent about 23,000 crores on pensions and about 29,000 crores on the NPS.

So, by taking this decision, the government will reduce fiscal pressure today and postpone it to the coming generations.

Second, there is also a concern of NPS employees about the pension amount on retirement may be affected by market fluctuations. NPS is linked to government bonds, giving stable returns, in the case of rise and fall in the market. However, the inflation-linked pension of the DPBS is attractive for employees looking to take risks.

Third, There were concerns about employees and government contributions not being transferred for investment in time. For example, CAG has pointed out such delays by state finance departments to contain their fiscal deficit on paper.

Fourth, NPS Employees were also concerned about benefits payable in case of death of an employee while in service.

What challenges does it bring to the state of Rajasthan?

Rajasthan already has a primary deficit of 29,400 Crore. This implies that Addison has to borrow money to even pay the interest on that earlier borrowings.

Rajasthan currently spends 23,000 crores on pension and 60,000 crores on Salaries and wages. This is 56% of its tax and non-tax revenues.

What steps can be taken to address these issues?

Rajasthan’s government can ask the finance committee for the accommodation of 0.5% of the state’s fiscal deficit limit. For the issue of payments in case of the death of an employee, the government can propose several alternative means like buying a group life insurance product, etc.

lastly, the world is moving away from defined pension benefits schemes. Rajasthan government should also do the same.

Source: This post is based on the article “Why Rajasthan government’s decision to return to the old pension scheme is a fiscal disaster” published in Indian Express on 3rd March 2022.