An ET analysis found that in 2021-22, for all of India’s states, over a quarter of their own taxes went into pension bills. Their combined pensions payments rose 11.9% annually since 2013-14, higher than the 10% rise in their own taxes over this period. If all the states flipped to the old defined-benefit pension system, pensions would consume 40.5% of their own tax revenues by 2046-47.
The analysis does not consider changes to employment and life expectancy over this period.
“It will eat away a large part of expenditures. Burden on the government is going to be huge,” cautioned NR Bhanumurthy, vice-chancellor, Dr B R Ambedkar School of Economics (BASE) University, Bengaluru.
In the case of the five states already on the old scheme now, this percentage would be 64.1%. Their growth rate of pensions between 2013-14 and 2021-22 was much higher at 12.8%, whereas the rise in own tax revenues was lower than the national average at 9.5%.
“Pension expenditure is a committed liability, once committed, resources will have to be found to pay them,” said D K Srivastava, EY India chief policy advisor and member of the Advisory Council to the 15th Finance Commission.
“It will put additional fiscal burden in the long-run and would create liabilities for the state government.”
At present, 90% of the states’ pension goes into servicing the old pension scheme, whereas contributions to the new pension scheme take up the balance of 10%.
Under the old scheme, pension is benchmarked to the last salary drawn, adjusted for inflation, and periodically revised in line with the pay commission awards.
“The New Pension Scheme has prevented the ballooning of the government’s pension expenditure,” Sunil Kumar Sinha, senior director-public finance and principal economist at Ind-Ra, said.
In the short run, however, states reverting to the old pension scheme may see an improvement in their finances as they would no longer have to make contributions to the National Pension System (NPS) accounts of employees.
They may save 7-10% of their expenditure on pensions immediately.
“A reversion to the old pension scheme may provide some relief to the government expenditure in initial years but will burden the government finances in future,” said Sinha.
Experts say the solution may be to make NPS more attractive and take away some benefits of old pension scheme.
Mukesh Anand, assistant professor at NIPFP, pointed out possible avenues for correction, like commutation of pension and leave encashment, which can be done away with. “There should be a convergence of all into ‘one’ scheme.”
“Some modifications can be considered to the national pension scheme to make it more attractive,” Srivastava added.