Financial Implications of the Old Pension Scheme - Muskaan Rawtani

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 The pension available to an employee is calculated using a defined benefit plan or a defined contribution plan. In the case of a defined benefit plan, the employee is entitled to receive a certain fixed amount or a certain percentage of their salary during their retirement. The direct benefit transfer provides security to the employees but with the increasing inflation and life expectancy it can be a huge burden for the employer.

In the case of a defined contribution plan the employer and the employee agree to contribute a pre-decided amount or percent of the salary towards the employee's retirement account this amount is generally invested in various income-generating assets and the corpus generated is used to support the employee during retirement. The major benefit for the employer in the case of a defined contribution plan is that the extent of the employer's liability is known.

The old pension scheme was based on the concept of defined benefit in which a government employee after serving a certain term was entitled to 50% of their basic salary and a dearness allowance which was revised twice a year. On the other hand, the new pension scheme is based on the concept of a defined contribution plan. So though there was more security provided in the case of the old pension scheme it was only available to government employees who form 3.2% of the workforce. The bill of pension was so huge that the government employees had a claim over 18% of government revenue, even as nearly 90% of India’s workforce has virtually no social security.

The reasons for reconsidering the scheme are twofold. Firstly, government employees are vocal and organized and the rest of the 97% are unaware or uninterested in the financial implications of bringing back the old pension scheme and the drain it’ll cause to the finance of state and central government. Most of the state governments will have little money left after payment of interest, salaries, and pensions. This would lead to a wide variety of implications. There will be decrease in the government’s investment in infrastructure or other forms of capital expenditure as there will be a lack of money available with them. This reduction in investment will have a multiplier and its impact on the GDP will be a multi-fold decline. This will also lead to a reduction in the pace at which productive capacity is increasing in the economy.

If the government wishes to avoid these implications and continue with the current level of spending along with the increased pension bills then it will need to borrow more money. This increased borrowing can be done through RBI which will lead to an increase in the money supply and increase inflation in the economy or it can be done through the small saving schemes which will increase the cost of borrowing for the government and crowd out the private investment. Third option would be borrow the money externally which can lead to decline in India’s credit rating as the external debt percentage increase. All of this will lead to negative consequences for the economy.

The second reason to bring back the old pension scheme is to relieve some pressure from the government’s finances in the short run with long-term detrimental effects. As the pension under the old pension scheme is paid out government’s revenue budget there is no need for provisioning for it currently, however in the case of a new pension scheme the government would need to pay the amount currently. So, moving back to the old pension scheme would immediately improve the budget of various governments.

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