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Old pension schemes could strain state finances, RBI warns

by WOOWinvest
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Old pension schemes could strain state finances, RBI warns

Amid the political slugfest over some states’ decision to return to the old pension scheme, the Reserve Bank of India has warned that old pension schemes could strain state finances in the future.

“A major risk looming large on the subnational fiscal horizon is the likely reversion to the old pension scheme by some states,” the central bank said.

“The annual saving in fiscal resources that this move entails is short-lived. By postponing the current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years,” it said in its report on state finances released Monday.

Himachal Pradesh is the latest one to announce restoration of the old pension scheme. It is the third Congress-ruled state after Rajasthan and Chhattisgarh to do so. Jharkhand, where Congress is an ally of the ruling coalition, has also returned to the old system while Aam Aadmi Party-ruled Punjab is considering it as well.

The states returning to the old system are saying that they are doing it for the sake of social security and welfare of their employees. However, some economists raised concerns about it saying that if states do not build any corpus for the same and the unfunded liability keeps growing with time, this would only invite disaster in the future.

The old scheme was replaced by the National Pension Scheme or NPS in short, for central and state government employees with defined contribution.

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