Why Congress's old pension scheme promise may have worked in Himachal Pradesh but not Gujarat

NEW DELHI: Congress's electoral victory in Himachal Pradesh will pave the way for the return of the old pension scheme in the state, which was one of the key poll promises of the grand old party.

In the first cabinet meeting itself, chief minister Sukhvinder Sukhu promised to implement the old pension scheme (OPS), also referred to as PAYG (pay-as-you-go) scheme.

Notably, Rajasthan and Chhattisgarh, which are ruled by the Congress, and Punjab, which is ruled by the Aam Aadmi Party (AAP), have reverted to the OPS.

Under OPS, the government employees receive 50 per cent of their last drawn basic pay plus dearness allowance or their average earnings in the last ten months of service, whichever is more beneficial.

Compared to OPS, in the new pension scheme, government workers contribute 10 percent of their basic salary to NPS, while their employers contribute up to 14 percent. It also allows workers greatr flexibility and an option to have a professional pension fund manager to ensure superior returns.

Notably, Congress had made a similar promise in Gujarat but the state clearly rejected the poll bait as it handed BJP its best ever electoral victory in the state so far.

While OPS wasn't the only factor for Congress's victory in Himachal or its drubbing in Gujarat, it did draw a sharp contrast between the demographics of the two states which went to the polls recently.

Why OPS promise may have worked in Himachal
According to government data, Himachal Pradesh has the highest proportion of payout to retired employees as a share of revenue spending.

In terms of committed spending as a proportion of revenue expenditure, Himachal’s 38.1% is next only to Jammu & Kashmir (41.1%) and Punjab (43.1%). The national average is 31.6%, according to RBI data based on the Budget estimates for 2021-22.

That's because the share of government employees in Himachal’s population is quite significant.



So while Congress's promise to bring back the scheme is not fiscally prudent, it does appeal to a large chunk of pensioners.

Comparatively, the share of government employees in Gujarat is less.

Moreover, the widespread support for PM Modi-led BJP was no match to the poll promise made by parties like Congress and AAP.

While OPS may have reverberated with voters in states like Himachal, economists say that the scheme puts a significant burden on the ex-chequer and is not financially wise in the long run.

Why OPS was discontinued
Prior to 2004, India had the PAYG plan where the beneficiaries decided how much they wanted to contribute either by having the specified amount regularly deducted or by contributing a lump sum amount.

Under this, contributions of the current generation of workers was explicitly used to pay the pensions of pensioners. Hence, a PAYG scheme involved direct transfer of resources from the current generation of tax payers to fund the pensioners.

According to a report by State Bank of India (SBI) economists in March this year, the scheme was in vogue in most countries prior to 1990s.

However, it was discontinued given the problem of pension debt sustainability, an ageing population, explicit burden on future generation and the incentive for early retirement (as the pension is fixed at the last drawn salary).

The PAYG scheme thus had no accumulated funds and or stock of savings for pension obligations and hence was a clear fiscal burden, SBI economists said.

Th report noted that the old pension scheme is always an attractive dispensation for political parties as the current-aged people can benefit from PAYG even though they may not have contributed to the pension kitty.

However, it warned that states should not commit to such "fiscal hara-kiri" in the quest for populism or it will lead be disastrous for the country’s growth potential.

It calculated that if all the states revert to the old scheme, and assuming an entry level age of 28 years, with a 5% inflation indexation, the current present value of the implicit pension liabilities will be around 13% of the GDP.

Meanwhile, the central government on Monday said there was no proposal under consideration for the restoration of the