All States shifting to Old Pension Scheme could result in aggregate pension liability of over ₹31-lakh crore

Shifting to the old pension scheme by all the States could result in a liability of over ₹31-lakh crore, a research report by State Bank of India said. It also said that combining all the contingent liabilities along with freebies promised during elections is estimated to be 10 per cent of Gross State Domestic Products (GSDP).

Old Pension Scheme is also known as the defined pension system, where an employee gets half of the last-drawn salary as pension for life and the entire amount is paid by the government. This system was replaced by the Contributor Pension System for government employees (barring armed forces) joining the job on or after January 1, 2004. Here the employee contributes 10 per cent of salary, while the government contributes up to 14 per cent.

Earlier this year, three States — Rajasthan, Chattisgarh and Jharkhand — reverted to the old system, while some political parties have made promises to do so in poll-bound States such as Gujarat and Himachal Pradesh.

The SBI research report estimates the current value of aggregate pension liability to be around ₹31.04 lakh crore if all the States were to shift to the old scheme. “In the absence of State-specific data, the approximate burden on States can be made using the proportionate rule. Accordingly, total pension liability for Chhattisgarh, Jharkhand and Rajasthan comes to ₹3-lakh crore,” it said.

Further, it said that when looked in relation to their own tax revenue, pension liabilities of States would be as high as 450 per cent of own tax revenue in case of Himachal Pradesh, and 138 per cent for Gujarat. For Punjab, Jharkhand, Rajasthan and Chhattisgarh, it is at 242 per cent, 217 per cent, 190 per cent and 207 per cent respectively.  

In some of the poll-bound States, political parties have promised to revert to the old pension scheme. It seems that States want to save money currently for giving freebies to people. However, the money for pensions would come from tax collection. “It seems unfair that only a certain section of people get this benefit of pension,” the report said.

Freebies vs welfare scheme

Citing that there is no clear definition or distinction between freebies and welfare schemes, the report said freebie is a transfer of goods and services to voters for free as a poll promise, which has been used since Independence.  Sometimes freebies help many — such as free bicycles to girl children, free breakfast to school children etc, but these schemes shouldn’t bleed the national/State economy, it said.

The report suggested that the Supreme Court panel should fix a band — say 1 per cent of GSDP or 1 per cent of State own tax collections or 1 per cent of State revenue expenditure — for welfare schemes. “With this, the desired welfare schemes can be implemented in a proper way,” it said.

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