Kerala, Uttar Pradesh and Punjab face the highest burden from pension outgo

Introduction of the Unified Pension Scheme (UPS) by the Centre recently has once again turned the focus on the pension burden faced by the Centre and the States. While there are around 70 lakh Central government pensioners, the pensioners of State government are much higher. The need to reduce the pension burden to support the fiscal balance is more important for States.

Data derived from State government Budgets by PRS Legislative Research shows that some States are facing an increasing burden from pension pay-outs. Pensions as a percentage of total State revenue expenditure for FY25 was the highest in Kerala at 17.2 per cent. Next on the list is Uttar Pradesh, which paid 16.2 per cent of its revenue expenditure as pension. In Punjab, pensions make up 15.6 per cent of its ₹ 1.2-lakh crore revenue expenditure, while Assam allocates 16.2 per cent of its ₹1.1-lakh crore revenue expenditure to pensions.

Paras Jasrai, Senior Economic Analyst, India Ratings and Research, said, “The high share of pensions in Kerala can be attributed to the large number of government employees, which places a significant financial burden on the State due to the need to pay substantial pensions.”

Sujan Hajra, Chief Economist and ED, Anand Rathi Shares and Stock Brokers, remarked, “Punjab bears a unique burden due to its large number of defence personnel, providing enhanced pensions to war widows and disabled soldiers.”

Hajra explained, “In Assam, while the percentage share of pension expenditure is high, the underlying reasons differ. The State has lower proportions of government employees and retirees relative to its population, and life expectancy is also lower at 66 years. Assam’s challenge is primarily rooted in its low total revenue, which magnifies the impact of pension expenditures on the State Budget.”

Among the 17 largest State economies by Gross State Domestic Product, 11 States have pension shares ranging between 10 per cent and 18 per cent of their revenue expenditure for FY25.

Shift to UPS?

The data indicate significant growth in pension expenditures in FY25. Maharashtra (30.3 per cent), Karnataka (28.8 per cent) and Uttar Pradesh (22.2 per cent) recorded the highest increase in their pension outgo.

Tushar Chakrabarty, Senior Analyst, PRS Legislative Research says, “States’ current pension expenditure is based on the number of government employees in previous years, the quantum and growth in their compensation during service (which impacts pension paid to retirees), the level of vacancies in government departments, and the life expectancy post-retirement. Uneven rate of government recruitment in some years can also lead to a sudden increase or decrease in the number of employees retiring at a particular point of time in the future.”

Jasrai said, “It is likely that many States will move towards the UPS. States with weaker fiscal positions, particularly those burdened by debt, are more inclined to support the UPS to manage their financial challenges.”