Palaniswami’s refusal to commit himself to Old Pension Scheme shows that it is unfeasible

The statement by AIADMK leader K. Palaniswami, indicating that a return to the Old Pension Scheme (OPS) would be contingent on the 'situation' and only 'feasible' promises would be made, brings to the forefront one of India's most critical fiscal policy debates: the sustainability of pension liabilities. This issue is not merely a political talking point but a fundamental challenge to the long-term financial health of both central and state governments.

**Background Context: The Shift from OPS to NPS**

Historically, India operated under the Old Pension Scheme (OPS), a 'defined benefit' system. Under OPS, government employees received a pension equivalent to 50% of their last drawn salary, with periodic Dearness Relief (DR) revisions. The entire pension liability was borne by the government, and there was no employee contribution. This system, while providing robust social security for employees, became fiscally unsustainable over time due to increasing life expectancy, a growing number of retirees, and a relatively smaller pool of contributing employees. The 'pay-as-you-go' nature of OPS meant that current government revenues were used to pay for the pensions of retired employees, creating an ever-expanding burden on the exchequer.

Recognizing this looming fiscal crisis, the Central Government, on January 1, 2004, implemented a major reform by replacing OPS with the National Pension System (NPS) for new recruits. Most state governments subsequently adopted NPS for their employees, albeit with varying timelines. NPS is a 'defined contribution' scheme, where both the employee and the employer (government) contribute a fixed percentage of the employee's salary (currently 10% from employee, 14% from employer). The accumulated corpus is invested in market-linked instruments, and the pension received upon retirement depends on the returns generated. This shift aimed to move the pension burden from the government's balance sheet to individual employees, promoting fiscal prudence and inter-generational equity.

**What Happened: Political Promises vs. Fiscal Reality**

K. Palaniswami's cautious stance reflects the dilemma faced by political parties. While there is a strong demand from government employee unions to revert to OPS, especially in states where elections are imminent, the financial implications are staggering. Several states, including Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh, have already announced their intention to revert to OPS, citing employee welfare and electoral promises. However, these decisions have been met with severe criticism from economists, the Reserve Bank of India (RBI), and the NITI Aayog, who have highlighted the severe fiscal strain such a move would place on state finances. Palaniswami's emphasis on making 'feasible' promises underscores the growing awareness, even among political leaders, of the unviability of OPS in the long run.

**Key Stakeholders Involved**

1. **Government Employees**: The primary beneficiaries of OPS and the group advocating most strongly for its return. They perceive OPS as a guaranteed and secure retirement benefit. NPS, being market-linked, carries investment risks and does not guarantee a fixed pension amount.

2. **State and Central Governments**: The primary payers of pensions. They grapple with the challenge of balancing employee welfare, electoral promises, and fiscal sustainability. Reverting to OPS would significantly increase their committed expenditure, potentially crowding out funds for development projects.

3. **Political Parties**: Use the OPS/NPS debate as a significant election plank, often promising a return to OPS to garner votes from a large and influential segment of the electorate.

4. **Taxpayers**: Ultimately bear the burden of government expenditure, including pensions. A fiscally unsound pension system implies higher taxes or reduced public services in the future.

5. **Fiscal Institutions (e.g., RBI, Finance Commissions, NITI Aayog)**: These bodies consistently advocate for fiscal prudence, warning against the long-term dangers of reverting to OPS and emphasizing the need for robust pension reforms.

**Significance for India: Economic, Political, and Social Impact**

Reverting to OPS poses a monumental threat to India's fiscal stability. The pension bill under OPS is unfunded, meaning no dedicated corpus is built up; instead, it's paid from current revenues. If states revert, the combined unfunded pension liability could skyrocket, leading to:

* **Fiscal Distress**: States would need to divert substantial portions of their budgets from capital expenditure (infrastructure, health, education) towards pension payments, hindering economic growth and development. The RBI, in its 'State Finances: A Study of Budgets' report, has repeatedly warned about the rising pension liabilities.

* **Increased Borrowing**: To meet rising pension obligations, states might resort to higher market borrowings, increasing their debt-to-GSDP ratio, which is already a concern for several states. This could lead to a 'debt trap' and impact their creditworthiness.

* **Inter-generational Inequity**: Future generations of taxpayers would bear the burden of funding the pensions of current retirees without contributing to their own retirement savings in a similar manner, creating an unfair distribution of fiscal responsibility.

* **Undermining Reforms**: A reversal to OPS would undo decades of fiscal reforms aimed at ensuring long-term financial health and could set a dangerous precedent for other policy areas.

**Related Constitutional Articles, Acts, and Policies**

The powers related to public debt and financial management are outlined in the Constitution. **Article 292** deals with the borrowing powers of the Union Government, while **Article 293** pertains to the borrowing powers of the States. Any significant increase in pension liabilities directly impacts these borrowing capacities. The **Seventh Schedule** of the Constitution places 'Public debt of the State' under the State List (Entry 43), giving states autonomy in managing their debt, but also making them solely responsible for the consequences. Pensions for state government employees fall under the purview of state governments. The **Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013**, established the PFRDA to regulate and promote pension funds, including NPS, and is central to the current pension architecture. Furthermore, the **Fiscal Responsibility and Budget Management (FRBM) Act, 2003**, and its state counterparts aim to instill fiscal discipline, which could be severely tested by a return to OPS.

**Future Implications**

The debate over OPS vs. NPS is likely to intensify, especially with upcoming state and general elections. While some states have reverted, the long-term fiscal consequences will become increasingly apparent, potentially forcing a re-evaluation. The Central Government and its financial institutions are likely to continue advocating for NPS and fiscal prudence. The political economy of pension reform will remain complex, balancing the immediate electoral incentives with the imperative of long-term economic stability. The challenge lies in finding a sustainable solution that provides adequate social security for employees without jeopardizing the nation's fiscal health.