The RBI warning to the states against OPS
Why is it in the news?
The report by the RBI warned states regarding the OPS (Old Pension Scheme), which was halted in 2004, saying that it would increase the fiscal burden on states in the coming years.
What does the central bank say about OPS?
The RBI says that OPS will lead to accumulated liabilities that will become a future threat or risk.
Some states planning to revert to the OPS will face a significant risk on the sub-national fiscal horizon.
The states are postponing the current expenses, which will risk the accumulation of unfunded pension liabilities in the coming years.
As per the budget 2022-23, states are expected to incur a 16% rise in their pension expenditure.
According to the SBI research report, the CAGR (Compounded annual growth rate) of pension liabilities was 34% for 12 years that ended in 2022. It was for all the state governments.
Why are states moving toward OPS?
The RBI start to warn states after they start to bring back OPS instead of NPS (New Pension Scheme).
States which announced to opt for OPS are Chattisgarh, Himachal Pradesh, Jharkhand, Punjab, and Rajasthan.
They opt for this because they find it easier to pay old pensioners with the money collected from the serving employees.
Under OPS, retired employees receive a monthly pension of 50% of their last drawn salary.
It is believed that OPS is fiscally unsustainable, and states do not have funds to finance them. As OPS has no accumulated funds or stock of savings for pension obligations, it is a fiscal burden on the states.
According to the SBI research report, for the political parties, pensions are more like schemes that can get benefit by providing pensions to current-aged people.
What are the OPS and NPS?
OPS
It is known as the PAYG (pay-as-you-go) scheme.
The unfunded pension scheme uses current revenues to fund the pension benefits.
Current workers’ contribution is used to pay for the pensions of retired person or pensioners.
It directly transfers resources from the current generation of taxpayers to fund the pensioners.
It was discontinued after the problem of debt sustainability was developed. That is ageing population is like a burden on future generations.
NPS (New Pension Scheme)
It is a contribution scheme pension under which the employees must contribute 10% of their salary (basic plus dearness allowance), and the government contributes 14%.
It is regulated by the PFRDA (Pension Fund Regulatory and Development Authority).
It enables the individual to undertake their retirement plan while in their employment tenure by following systematic savings and investments. It facilitates the accumulation of a pension during the working life of employees.
It was developed to deliver a sustainable solution by providing adequate retirement income in old age.
It is mandatory for the central government employees who joined their services on or after January 1, 2004.
More than half of the states have adopted this for their employees.
