Why the Old Pension Scheme is a bad economics?

Context

The decision of various state governments (Rajasthan, Chhattisgarh, and Punjab) to revert to the Old Pension Scheme (OPS) rather than apply the New Pension system has attracted several criticisms and concerns over the economic instability in the States.

Background

The history of the Indian pension system dates back to the colonial period of British India.
The Royal Commission on Civil Establishments, in 1881, first awarded pension benefits to government employees.
The Governments of both centers and States fund the Pension of retired officials and Employees working for them using their revenues.
The pension is regarded as a Liability for the Government which it has to pay using its funds. However, over the last three decades, pension liabilities for the Centre and states have jumped manifold.
- In 1990-91, the Centre’s pension bill was Rs.3, 272 crores, and the outgo for all states put together was Rs.3, 131 crores.
- By 2020-21, the Centre’s bill had jumped 58 times to Rs.1, 90,886 crores; for states, it had shot up 125 times to Rs.3, 86,001 crores.
This has made a compulsion to use a sustainable method of financing Pensions to employees for both Centre and the States.

About

How does the Pension system work in India?

All pension plans in India provide guaranteed maturity benefits. This is the reason why pension plans in India are also known as guaranteed pension plans.
The maturity benefits are generally the fund value or 101% of the Premium paid, whichever is higher.

The Old vs. New Pension scheme:

Old pension Scheme (OPS)	New Pension Scheme
The OPS is an assured inflation-indexed monthly family pension till you (and your spouse) live(s). The OPS level is linked to the last pay pensioner drew.	The NPS is a retirement savings scheme to secure the life of an individual financially after retirement. Its value is determined by the market prices in which the corpus is invested.

The Concerns associated with the Old pension scheme:

The pension liability remained unfunded: as there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
No fixed source of funding: The Government of India's budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
The burden on Government Budget: The government estimated payments to retirees ahead of the Budget every year, and the present generation of taxpayers paid for all pensioners as of date.
- The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.

The Government’s Income and Expenditure:

Income:
- Direct taxes: Income tax, corporation tax, national insurance contributions, council tax, etc.
- Indirect Taxes: Indirect taxes are typically added to the prices of goods or services. Sales tax, value-added tax, excise tax, and customs duties are examples of indirect taxes.
Expenditure:
Capital expenditure: Capital expenditure (CapEx) is money that is spent to acquire, repair, update, or improve a fixed company asset, such as a building, business, or equipment.
Types of capital expenditures can include purchases of property, equipment, land, computers, furniture, and software.
Current expenditure: Current expenditures refer to short-term spending that is fully expensed in the fiscal period in which it is incurred.
Examples of this type of expenditure include wages, salaries, raw material costs, and administrative expenses.

Negative Impacts of the Old Pension scheme:

Rolling out a major amount of money: Overall, pension payments by states roll out a quarter of their tax revenues. For some states, it is much higher.
- For Himachal, it is almost 80 percent (pensions as a percentage of the state’s tax revenues); for Punjab, it is almost 35 percent; for Chhattisgarh 24 percent; and for Rajasthan 30 percent.
The high Budget deficit for Governments: If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their tax receipts.
Long-term Burden on Tax-payers: The current taxpayers paying for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels.
- This means the pension of someone who retired in 1995 may well be the same as that of someone who retires in 2025.