Offering a Compromise

The Unified Pension Scheme (UPS), a blend of the Old Pension Scheme (OPS) and the National Pension Scheme (NPS), is designed to shield the Centre and states from escalating economic liabilities. Despite criticism from the Congress, which failed to outrightly reject the UPS, the scheme is positioned as a balanced approach to manage future pension burdens.

Two years ago, on November 13, 2022, Dr. Arvind Panagariya, a renowned economist and the current chairman of NITI Aayog, condemned the reinstatement of OPS as "morally erroneous" and a "sinful act" that would create substantial liabilities for future governments. His concerns were echoed by Rajiv Mehrishi, former Union Finance Secretary and ex-CAG, who criticized the Congress-led Rajasthan government’s decision to revert to OPS in 2022, calling it financially reckless and politically motivated.

In light of these warnings, the Modi government has introduced the UPS with upcoming state polls in mind, particularly in Haryana, Jammu & Kashmir, Maharashtra, and Jharkhand. The scheme aims to mitigate dissatisfaction among government employees, particularly in BJP-ruled states, by offering a compromise that integrates the benefits of OPS with the sustainability of NPS.

Prime Minister Narendra Modi emphasized that the UPS ensures dignity and financial security for government employees, aligning with the government's commitment to their well-being. However, Congress President Mallikarjun Kharge criticized the government’s "U-turn," but notably, did not oppose the UPS outright, suggesting instead that pensions should be based on full pre-retirement salaries rather than the proposed 50%.

BJP ruled Maharashtra became the first BJP-ruled state to adopt the UPS, with implementation set for April 1, 2025. The scheme is seen as a pragmatic response to the growing financial strain posed by OPS, which, according to Reserve Bank of India (RBI) reports, could lead to unsustainable fiscal stress if widely implemented.

Political analysts believe that other states, particularly Haryana, may soon follow Maharashtra’s lead, given the fiscal challenges posed by OPS. In states like Himachal Pradesh and Rajasthan, where OPS promises helped political victories but led to financial crises, the UPS offers a more balanced solution.

Financial experts warn that without sustainable reforms like the UPS, the growing pension liabilities could severely impact India’s fiscal stability, diverting resources from other critical public spending areas. The UPS represents a crucial step towards addressing these challenges, balancing the need for employee benefits with the long-term health of the economy.

The fiscal year 2024-25 is poised to witness significant pension burdens for both the Central and state governments, highlighting an escalating strain on public finances. The Central Government’s pension bill is projected to reach ₹2.53 lakh crore, covering retired civil servants, defence personnel, and other beneficiaries. Meanwhile, state governments are bracing for a combined pension expenditure of approximately ₹5.73 lakh crore, with states like Uttar Pradesh, Maharashtra, and West Bengal shouldering particularly heavy liabilities.

This growing financial weight underscores the urgent need for pension reform. The Comptroller and Auditor General (CAG) has repeatedly emphasized the necessity for both state and central governments to transition from defined benefit schemes, like the Old Pension Scheme (OPS), to defined contribution models, such as the newly introduced Unified Pension Scheme (UPS).

The UPS introduces a contributory model where both employees and the government contribute to the pension fund. This shared responsibility builds a robust pension fund over an employee’s career, with contributions invested to generate returns. Unlike the OPS, which is an unfunded scheme, the UPS is backed by actual assets, ensuring long-term sustainability and reducing the financial burden on the government. The UPS guarantees a minimum pension amount, adjusted for inflation, and includes benefits like guaranteed family pensions in the event of a pensioner’s death, providing comprehensive retirement security.

In contrast, the OPS is a non-contributory, unfunded scheme, placing the entire financial responsibility on the government. Pensions under the OPS are calculated based on the last drawn salary, typically at 50% of the last basic pay, ensuring predictability and financial security. However, this approach creates significant fiscal strain as the number of retirees grows, with no dedicated fund to support these pensions, making it increasingly unsustainable.

Over the past three decades, pension liabilities have surged dramatically. In 1990-91, the Centre’s pension expenditure was ₹3,272 crore, while the states’ combined outgo was ₹3,131 crore. By 2020-21, these figures had skyrocketed to ₹1.9 lakh crore for the Centre and ₹3.86 lakh crore for the states. This trend is expected to continue, limiting fiscal space for essential development and welfare spending.

The latest data for 2023-24 already points to this growing financial strain. The central government’s pension bill was projected at ₹2.39 lakh crore, with states like Maharashtra and Uttar Pradesh anticipating expenditures of ₹45,000 crore and ₹50,000 crore, respectively. Without sustainable reforms, the rising pension costs could severely impact fiscal stability, diverting resources from critical areas of public spending.

The shift to the UPS reflects a strategic move to balance financial sustainability with employee benefits. As pension liabilities continue to rise, this reform is crucial to preventing future economic distress and ensuring that public resources are managed effectively. However, the political and economic challenges of implementing such reforms cannot be underestimated. The debate between the UPS and OPS is not merely about pensions; it is about the future financial health of the nation.

K.S.TOMAR is a political analyst and strategic affairs columnist having foreign posting experience