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Business News/ News / India/  'Major step backwards,' RBI article warns states reverting to the old pension scheme

As a number of states are reverting to old pension schemes, an RBI article has called the move to be a ‘major step backwards’ in managing fiscal deficit. It also said that OPS may take the fiscal stress of states to “unsustainable levels" in the medium to long term.

The article, written by Rachit Solanki, Somnath Sharma, R K Sinha, S R Behera and Atri Mukherjee, highlighted that 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 research underlined how a few states are opting for OPS because of their short term benefits. However, it also contains repercussions in long term. Even after getting rid of the NPS contribution, state governments are expected to witness “severe pressure" on their finance because of unfunded OPS, underlined the RBI article.

States that have opted for OPS

Recently, Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal PRadesh have announced reversal to the OPS from NPS.

"… 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.

One one side, the OPS has Defined Benefits (DB), whereas, the NPS has defined contributions. By opting for OPS, states will save only 0.1% of GDP in yearly pension outgo till 2040. The amount saved with OPS, is likely to fall short against the increase in expenditure in the scheme. These states would be required to incur an average additional increase in pension expenditure by 0.5 per cent of yearly GDP post 2040.

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Updated: 19 Sep 2023, 06:30 PM IST
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