Economy
UPS could give states fiscal respite, but pensions still fraught with challenges
Summary
The unified pension scheme (UPS) for government employees launched last month could provide some relief to states by halting them from reverting to the old pension scheme.
The revised pension scheme for government employees announced by the Centre last month, and its likely adoption by states, could provide some relief to state governments in the mounting scale of their pension liabilities. Between 2016-17 and 2023-24, states’ combined pension expenditure increased at a steep 12.7% per year, against 9% for the Centre.
The old pension scheme (OPS), in force till 2004, entitled retired government employees to a pension equal to half their last drawn pay—or, a ‘defined benefit’. It was replaced by a new scheme, now called the National Pension System (NPS), in 2004. The NPS was a ‘defined contribution’ system, and the pension amount depended greatly on what an employee contributed towards it during their working life. Thus, the NPS shifted the onus from the government to employees.
However, in recent years, several states, including Rajasthan, Jharkhand, Chhattisgarh and Punjab, went back to the OPS, adding to their pension liabilities. Other states were also under political pressure to do so. As it is, states are running a high pension bill. In 2023-24, the combined pension expenditure of 28 states and three Union territories (UTs) was 12% of their total revenue expenditure, and that of the Centre was 7.4%. Further, for 25 states/UTs, this figure crossed 10%.
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The upcoming variant, the unified pension scheme (UPS), can halt states from reverting to OPS and instead shift to UPS. The UPS strikes a middle ground by reverting to a defined benefit system, but with some contribution from employees.
Defence unrest
For 2024-25, the Centre’s projected spending on pensions is ₹2.67 trillion. The single biggest group in this is defence personnel, with about ₹1.41 trillion earmarked for them. In the last nine years, pension payments to defence personnel have amounted to 23-27% of total defence expenditure.
Defence pensions are also among the categories of pensions under dispute. Retired defence personnel have agitated for years for a ‘one rank, one pension’ (OROP) scheme. This would allow retired personnel to draw the same pension for a given rank or length of service, irrespective of the date of retirement. This would enable older pensioners to benefit from increases in pay of existing service members of similar ranks. While the current government introduced a version of the OROP in 2016 (causing defence pension expenses to rise sharply), it has continued to face criticism from retired personnel.
Pension track
The Centre’s projected 2024-25 spending of ₹2.67 trillion on pensions doesn’t depict the full picture. While it covers defence pensions, it excludes those of the Indian Railways and public sector enterprises or banks. For 2024-25, the Indian Railways has budgeted ₹67,000 crore towards pensions, amounting to 24% of its total revenues. The Centre does not directly pay railways pensions. However, since the Railways doesn’t generate enough revenues to service its pension liabilities, the Centre is on the hook for such commitments indirectly.
In 2022-23, the Railways paid pension to around 1.6 million retired employees, up from 1.3 million in 2011. Its current total staff is 1.2 million. It was in the 1980s that its working employee base increased to about 1.6 million, and it is these employees who are beginning to retire now. This will further increase the Railways’ pension bill in the coming years.
Social insecurity
Governments, both at the Centre and states, are spending a substantial amount on pensions. Yet, in India, any form of old-age social security is rare outside of public sector employment, and is largely limited to salaried employees of large companies. But even within this category of salaried employees, less than 50% are covered with any form of social security, including pensions or other retirement benefits.
The government does have old-age social security schemes for non-government employees, but their outlays are minuscule compared with payouts for government employees. For instance, the total outlay under the Indira Gandhi pension schemes for the aged, widows, disabled and other categories of recipients was around ₹9,600 crore in 2024-25. Further, these schemes are meant largely for below poverty line households. India’s pensions envelope ends up being limited and competes with several other imperatives.
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