Unified Pension Scheme: Isn’t It an Extra Burden on the Exchequer?

 

The existing pension system in India is highly skewed. Retirement schemes such as provident and pension funds predominantly cover workers from the organized sector, which hardly constitute 10% of the workforce. The remaining 90% of the working population engaged in the unorganized sector has no access to any formal system of old-age economic security. Coupled with this, like in most developed countries, we do not have a universal social security system that protects the elderly from economic deprivation. 

Again, within the organized sector, there exists a dichotomy. Employees of the private sector have access only to a provident fund system. It is a defined-contribution program under which, workers and employers contribute each around 10-12% of monthly earnings. At retirement, the fund pays the employee the accumulated amount along with the accrued interest. Against this, government employees’ programs run on a pay-as-you-go defined-benefit basis. And, this scheme is non-contributory. Thus, the entire pension payment becomes a part of the government’s annual revenue expenditure.    

However, as the pay-as-you-go defined-benefit scheme involves transfer of funds to pensioners from the earnings of the current workforce, which as a proportion to the retired people is dwindling, policymakers realized that the scheme is becoming fiscally unhealthy and unsustainable. The increasing lifespan of the retired people has further worsened the scenario. 

Against this backdrop, the then government under the Prime Minister Atal Bihari Vajpayee replaced the Old Pension Scheme (OPS) with a New Pension Scheme (NPS) on January 1, 2004. 

The NPS is a market-linked pension system under which pension payment is based on defined contributions from both employees and the government. Under NPS, employees are required to contribute 10% of their salary with a matching contribution from the government. Later in April 2019, the government’s contribution was increased to 14%. The said collections were deposited in a pension fund scheme selected by the employees for investment in market-linked securities. The Pension Fund Regulatory and Development Authority regulates these funds. There is, however, no certainty about pension incomes. The NPS is implemented for all government employees except Armed Forces who joined the service on or after January 1, 2004.    

Now the present government has launched the Unified Pension Scheme (UPS). It borrowed the defined contribution of NPS and the defined benefit of OPS. Under it, employees contribute 10% of their basic salary plus dearness allowance (DA), while the government contributes 18.5% of the basic salary and DA. More importantly, it guarantees a pension of 50% of the last drawn salary based on the average of the previous 12 months to all those employees with 25-plus years of service. A minimum pension of 10,000 shall be paid for those who worked for a minimum period of 10 years. Similarly, a family pension @60% of an employee’s pension at the time of his/her demise shall be paid to the dependents. Pension payments are also hedged against inflation by raising the pension payments in line with the consumer price index (CPI). A lump sum superannuation payout over and above the gratuity is also promised. The UPS, thus, ensures payment of a defined pension amount.   

Announcing the UPS, the government observed that it “aims to provide stability, dignity, and financial security for government employees post-retirement, ensuring their wellbeing and a secure future”. 

This, however, posits a battery of questions. In making the UPS an assured pension scheme, the government has to bear any gap between the eventual earnings on these contributions and the promises made under the scheme. So, will it not impose an additional burden on the exchequer? Will it not burden future governments? 

Of course, one may argue that future growth in the economy shall absorb the additional burden without threatening fiscal prudence. But there is also an argument that the shift from NPS to UPS will impact future allocations to education and health sectors which are languishing even now with an allocation of hardly 2.6% and 2.1% of GDP, respectively. 

Over it, analysts are also worried about the old-age security of 90% of the workforce that is employed in unorganized sectors. Their question is: Aren’t they to live with dignity in old age? Indeed, they consider them as the contributors of a major chunk of GST, which incidentally funds the ‘certainty’ of the UPS. Their argument is: These issues too merit the attention of policymakers.