OPS vs NPS: The hard facts

The National Pension Scheme (NPS) was conceived during Atal Bihari Vajpayee’s government in 2003 and rolled out on 1 January 2004, by the then BJP-led Vajpayee government. However, it was implemented thereafter by the Congress in several States after it came to power in 2004. Both Manmohan Singh and P Chidambaram, at that time, lauded […]

The National Pension Scheme (NPS) was conceived during Atal Bihari Vajpayee’s government in 2003 and rolled out on 1 January 2004, by the then BJP-led Vajpayee government. However, it was implemented thereafter by the Congress in several States after it came to power in 2004. Both Manmohan Singh and P Chidambaram, at that time, lauded the NPS, calling it a much needed and necessary reform.  Hence it is nothing but sheer hypocrisy that the Congress is trying to turn the clock back on pension reforms by wanting to replace NPS with OPS. When the Narendra Modi led government came to power in 2014, it offered tax benefits on the NPS scheme to make it even more effective and tax friendly. Interestingly, the Congress that won Himachal Pradesh assembly elections recently on the basis of bringing back the old pension scheme (OPS), had made similar promises in Rajasthan and Chhattisgarh too but failed to implement it, realizing that OPS can be a huge drain on the State exchequer. 

The Aam Aadmi Party-ruled Punjab has also announced dumping of the NPS and reinstating OPS, despite Punjab’s debt situation being precariously high. While a lot of noise around OPS may just be false bravado by the Opposition, it is disappointing that the Opposition is even thinking of replacing NPS with OPS. With its tax benefits, extremely low expense ratio and professional management, the NPS is a very good retirement product. 

Under the OPS, “pay as you go” scheme, contributions from the current generation of workers are used to pay for pensions of current pensioners, making it an unfunded pension scheme, with a direct transfer of resources from the current generation of taxpayers, to fund the pension liabilities of older generations. The younger generation has to subsidise the older generation under OPS, making the intergenerational inequity even starker.

According to a research by SBI, the compounded annual growth in pension liabilities for the 12-year period ended 2021-22 was 34% for all State governments. The OPS was a key promise of the Congress in the Himachal Pradesh election. The State has a large number of government employees as the public sector is the biggest source of employment in the State. How is the Congress planning to implement the OPS? Clearly, Congress is not planning to do so. Deep within, the Congress knows, if it does so, it would push Himachal to the edge of bankruptcy. Just like in Rajasthan, the Congress will simply keep postponing its promise to implement OPS and buy time. 

India’s retirees will live longer due to higher life expectancy, which means they will draw pensions longer than before. By 2050, India’s population will be 1.64 billion, of which 320 million will be of 60 years of age or older. Life expectancy which barely 56 years in 1990s is now almost 79 years. A key metric, the old-age dependency ratio, defined as the number of persons 60 years and over per 100 persons of 15 to 59 years age, is expected to touch 23% by 2036, compared to the current 16%. To cut to the chase, given the higher dependency ratio going forward a scheme like OPS will only add to the excruciating financial burden on State budgets, leaving less room for development oriented expenditure. 

The pension payout of States has risen from 2.1% of total revenue receipts in 1980-81 to 11% by 2001-02 and to an unhealthy 20% by 2020-21. This return to OPS will bring very limited financial gains in the short term to the State governments; they can skip the 14% contribution towards employee pension funds, but at what cost? 

The primary reason for exiting the OPS 18 years back, was its unsustainability. So for the Congress to bring it back now is bad economics and that is rarely good politics when State finances are stretched. The pension bill for Himachal Pradesh is more than 79.93% of its own tax revenues, for Bihar it is 58.9%, Punjab 34.24%, Rajasthan 30.38% and Chhattisgarh 24.19%. In 1990-91, the Centre’s pension bill was Rs 3272 crore and for all States put together it was Rs 3131 crore. By 2020-21, the Centre’s pension obligations had jumped 58 times to 

Rs 1.91 lakh crore; for States, it had jumped by 125 times to Rs 3.86 lakh crore.

But the biggest argument against OPS, for example in Himchal, is that it is unethical as it seeks to create liabilities that will not apply to the present Congress government but will apply to a State government in the future, which may not necessarily be a Congress led one, but could be from any other political Party. The earliest liability will be in 2034 for the current Congress government in Himachal. So basically, what the Congress is really doing is trying to shift the entire burden of the OPS to the government which will be in power in 2034.  

The OPS was based on the fiscally unsustainable concept of “defined benefit”. Under it, the pension of government employees was fixed on the basis of the last drawn salary.  Since its launch, the NPS has built a robust subscriber base. At the end of October 2022, NPS had 23.3 lakh Central government subscribers and 58.9 lakh State government subscribers. Then there are others, including 15.92 lakh subscribers from the corporate sector, and 25.45 lakh from the unorganised sector. The total assets under NPS stood at Rs 7.95 lakh crore as on 31 October 2022.

The fiscal implications of OPS will be grave. Under the OPS, retired government employees will receive 50% of their last drawn basic pay as a monthly pension. NPS is, however, a contributory pension scheme under which employees contribute 10% of their salary (Basic + Dearness Allowance). The government contributes 14% towards the employees’ NPS accounts. 

NPS is designed on the basis of “Defined Contribution” .There is no defined benefit that would be available at the time of exit. 

Combined debt of State governments has risen from 26.3% of GDP in 2019-20 to 31.2% in 2021-22 (budget estimate). This will need to be brought down to manageable levels. States will also have to contend with the GST compensation cess ending in its current form in the coming year. Shifting back to OPS will only further increase the burden on the State exchequers; as per RBI, the total pension expenditure of all States put together stood at a whopping Rs 3.86 lakh crore in 2020-21. Hence, political Parties like Congress must desist from fiscally unwise moves like OPS and stick to fiscally sustainable NPS, which is what the Modi government has been implementing on a war footing. To cut to the chase, the clock is ticking–it is time for the Congress Party to shed political opportunism and shed the OPS, in favour of NPS. 

Sanju Verma is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘The Modi Gambit’.