RBI Warns States: Reverting to OPS May Overwhelm Finances

In a recent study conducted by Reserve Bank of India (RBI) officials, the decision by certain states to transition back to the Old Pension Scheme (OPS) from the National Pension Scheme (NPS) has raised concerns over the mounting fiscal burden they may encounter. This shift, seen as a step backward, could potentially result in fiscal stress that becomes unsustainable in the medium to long-term. 

The findings of the study, titled "Fiscal Cost of Reverting to the Old Pension Scheme by the Indian States – An Assessment," published in the RBI's monthly bulletin for September, paint a stark picture of the financial challenges faced by states opting for OPS.

The RBI study highlights that, by 2050, the pension outgo under OPS is projected to soar to over ₹17 lakh crore, a staggering four-and-a-half times higher than the ₹4 lakh crore projected under NPS. This massive disparity in pension obligations is a matter of serious concern for states grappling with the decision to revert to OPS.

States Opting for OPS

Several states, including Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh, have recently announced their intentions to transition back to OPS, which was also known as the old pension scheme. This move, though potentially appealing in the short-term, could lead to dire consequences in the future, warns the RBI.

OPS vs. NPS: A Comparative Analysis

Under the old pension regime, the government bore the entire pension burden, which was 50 percent of the last drawn salary of the employee. In contrast, NPS is a defined contribution scheme in which employees contribute 10 percent of their basic salary and dearness allowances, with a matching contribution from the state government. 

As of November 2022, approximately 50 lakh state government employees had subscribed to NPS, collectively contributing ₹2.5 lakh crore to the NPS corpus.

A Soaring Fiscal Burden

The study calculates that the shift from NPS to OPS could lead to an average increase of around 4.5 times in the overall pension burden of the states from March 2023 to March 2084. By the early 2060s, this burden is estimated to reach approximately 0.9 percent of GDP, further exacerbating fiscal challenges for these states.

Authorship and Disclaimer

The RBI article, titled "Fiscal Cost of Reverting to the Old Pension Scheme by the Indian States – An Assessment," was authored by Rachit Solanki, Somnath Sharma, and Samir Ranjan Behera from the Department of Economic Policy Research (DEPR), along with R K Sinha from the Monetary Policy Department (MPD).

It was prepared under the guidance of RBI Deputy Governor Michael Patra. The RBI clarifies that the views expressed in the article belong to the authors and not necessarily to the institution.

Implications for States

States currently allocate approximately 38 percent of their total committed expenditure to pension payments. This makes pension expenditure one of the major components of their financial commitments, alongside interest payments and administrative expenses. The RBI study emphasises that while reverting to OPS may appear attractive in the short-term, the long-term burden of OPS pension outgo is poised to eclipse any short-term gains, creating a significant fiscal challenge for the states.

In conclusion, the RBI's study serves as a cautionary note for states contemplating a shift from the NPS to the OPS. The decision to revert to the old pension scheme should be carefully weighed against its substantial fiscal implications, taking into account the well-being of both state employees and the state's financial stability.