An ET analysis found that in 2021-22, for all Indian states, more than a quarter of their own taxes were spent on pension bills. Their combined pension payments have increased by 11.9% per year since 2013-14, which is higher than the 10% increase in their own taxes during this period. If all states switched to the old defined-benefit pension system, pensions would consume 40.5% of their own tax revenue by 2046-47.
The analysis does not take into account changes in employment and life expectancy over this period.
“It will eat away a lot of the expenditure. The burden on the government is going to be huge,” warned NR Bhanumurthy, Vice-Chancellor, Dr BR Ambedkar School of Economics (BASE) University, Bangalore.
In the case of the five states already on the old plan now, that percentage would be 64.1%. Their pension growth rate between 2013-14 and 2021-22 was much higher at 12.8%, while own tax revenue growth was below the national average at 9.5%.
“Pension expenses are an incurred liability, once incurred, resources will need to be found to pay for them,” said DK Srivastava, EY India’s chief policy adviser and advisory board member of the 15th Finance Commission.
“It will add an additional long-term tax burden and create liabilities for the state government.”
At present, 90% of the States pension is spent on serving the old pension scheme, while contributions to the new pension scheme make up the remaining 10%.
Under the old scheme, the pension is indexed to the last salary received, adjusted for inflation and periodically revised according to the powers of the salary commission.
“The new pension scheme has prevented government pension spending from surging,” said Sunil Kumar Sinha, senior director of public finance and senior economist at Ind-Ra.
In the short term, however, states returning to the old pension system may see an improvement in their finances, as they would no longer have to make contributions to employees’ National Retirement System (NPS) accounts.
They can save 7-10% of their retirement expenses immediately.
“A return to the old pension scheme may bring some relief to public spending in the early years, but will weigh on public finances in the future,” Sinha said.
Experts say the solution could be to make the NPS more attractive and remove some benefits from the old pension scheme.
Mukesh Anand, an assistant professor at NIPFP, pointed to possible avenues for remediation, such as pension commutation and vacation cashing, which can be removed. “There should be a convergence of all into one scheme.”
“Certain changes can be considered to the national pension scheme to make it more attractive,” Srivastava added.