Future imperfect – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/todays-paper/tp-opinion/future-imperfect/article65202809.ece

States should avoid the urge to revert to old pension system, and stay with the time-tested NPS system

The Rajasthan government’s Budget proposal to revert all its employees to the old pension system represents the reversal of a very significant reform and sets an undesirable precedent. The National Pension System (NPS) has been the default scheme for all government employees since 2004. It’s not clear if short-term fiscal considerations or political populism prompted this about-turn. But the NPS has seen persistent rumblings of discontent from government employees and its rollback often features in poll promises, so there’s a real risk of other States trying to emulate Rajasthan. Such an eventuality would represent a big setback to fiscal reforms and saddle future generations with a disproportionate financial burden on supporting the elderly.

Both from a fiscal and welfare standpoint, the market-linked NPS is superior to the defined-benefit system. The NPS requires both the employer and the employee to make regular contributions during the employee’s working life, which gets invested in market instruments to build a corpus that can be used to fund pensions after 60. In the old system, the government guarantees fixed pensions to all employees based on their last-drawn pay without addressing the funding problem. The struggles the EPFO has been facing every year to declare high returns amid falling market interest rates, illustrates the challenge that governments would be taking on with the guaranteed return model. The NPS front-ends the government’s contribution to creating a social security net for retirees, while the old system postpones this obligation. Moving all government employees to the old system therefore, would saddle future generations with ballooning pension payouts that crowd out developmental expenditure. India is expected to see a 41 per cent spike in its elderly population in the next decade with its old age dependency ratio likely to rise from 15.7 per cent to 20 per cent.

Populism apart, it must be recognised that there are short-term fiscal pressures that impel State governments to kick the can down the road. Presently, with both the old and new pension systems in operation, States are dealing with the twin burden of funding pensions for their retirees, along with NPS contributions for their recent recruits. The Centre and the Finance Commission can perhaps offer States some fiscal leeway to address this anomaly. The government, with PFRDA, can also do more to showcase NPS’ advantages to employees, while addressing their genuine concerns. Despite roller-coaster markets, NPS managers with a ten-year track record have managed a 11-12 per cent return on equity assets and 8-9 per cent on debt assets. Employees who would like to avoid stock market volatility can also choose to invest only in the corporate bond or government securities options in the NPS. To address subscriber concerns about uncertain pension payouts, the Centre needs to do away with the restrictive rules governing the end-use of the accumulated NPS corpus. The annuity schemes on the NPS menu need to be improved with better returns and tax breaks on annuity income.

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