States shifting to old pension scheme major step backwards, fiscally unsustainable: RBI article

States reverting 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, R K Sinha, S R Behera and Atri Mukherjee said the cumulative fiscal burden in the case of the Old Pension Scheme (OPS) 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 (RBI).Recently, Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh have announced reversal to the OPS from NPS, the article said.

The OPS has Defined Benefits (DB) while the NPS has defined contributions, the article said, adding that while the OPS has a short term allure, the same poses challenges 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.

"States' 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 article warned.

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

States will save only 0.1 per cent of GDP in yearly pension outgo by reverting to the OPS till 2040 but would be required to incur an average additional increase in pension expenditure by 0.5 per cent of yearly GDP post 2040.

It said several developed economies with DB schemes in the past have faced rising public expenditure due to the rising life expectancy of its citizens, and the changing demographic profile and rising fiscal costs have compelled several economies around the world to re-examine their pension schemes.

"Any reversion to the OPS by the states would be fiscally unsustainable, though it may result in an immediate fall in their pension outgo," the article said.