States’ reverting to the  Old Pension Scheme (OPS) would be taking a major step backwards which can increase their fiscal stress to unsustainable levels in the medium to long-term, according to an article in the latest RBI Bulletin.

“Cumulative fiscal burden in case of OPS could be as high as 4.5 times that of New Pension Scheme (NPS), with the additional burden reaching 0.9 per cent of GDP annually by 2060. Thus, short-run reduction in States’ pension outgo which may be driving decisions to restore OPS, would be eclipsed by the huge rise in future unfunded pension liabilities in the long-run,” the article said.

As at end-November 2022, the cumulative number of State government employees subscribing to NPS rose to around 50 lakhs with their cumulative contribution in NPS corpus amounting to ₹2.5 lakh crore

“Recently, a few States like Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh have announced reversal to the OPS from NPS. The immediate gain is that they will not have to spend on NPS contribution of the current employees. In future, however, the unfunded OPS is likely to exert severe pressures on their finances, especially with increasing longevity,” the article said.

“Any reversion to OPS by the States would be fiscally unsustainable, though it may result in an immediate fall in their pension outgo. Reverting to OPS from NPS by the Indian States will be a major step backwards undermining the benefits of past fiscal reforms and compromising the interest of future generations,” it added