Return To Old Pension Scheme Poses Financial Burden, Hampers Growth-Oriented Capital Expenditures: RBI Report

In a report released on Monday (11 December), the Reserve Bank of India (RBI) has cautioned against the return to the Old Pension Scheme (OPS) by certain states, stating it would pose a substantial financial burden and impede their ability to undertake growth-oriented capital expenditures.

The report, titled "State Finances: A Study of Budgets of 2023-24," emphasised that any shift back to OPS would represent a significant setback, undermining the advantages of previous reforms and compromising the interests of future generations, as reported by Indian Express.

The OPS is a defined benefit (DB) scheme where state government employees receive a pension equivalent to 50 per cent of their last drawn salary after retirement.

In contrast, the New Pension Scheme (NPS) is a defined contribution (DC) scheme in which employees contribute 10 per cent of their basic salary and dearness allowances, matched by a contribution from the state government.

The report noted that reverting to OPS in a few states, coupled with indications of others following suit, would exert a substantial burden on state finances, limiting their capacity to engage in growth-enhancing capital expenditures.

Internal estimates also suggest that if all state governments shift from NPS to OPS, the cumulative fiscal burden could be 4.5 times that of NPS, with an additional burden reaching 0.9 per cent of GDP annually by 2060.

Lastly, the RBI urged states to improve financial management of public sector units (PSUs) for better overall fiscal health.