Recognising the hard work of the government employees in the progress of the nation, Narendra Modi’s cabinet recently approved the Unified Pension Scheme which aims to bring dignity and financial stability to the retiring government employees. This major reform, recommended by the TV Somanathan committee, is expected to benefit approximately 23 lakh Union government employees, with the potential for state employees to participate as well. The UPS has been described by experts as a win-win solution, combining the advantages of both the NPS and OPS.
Evolution of India’s Pension System
Until 2004, India followed a pay-as-you-go pension system, where the government provided full funding for the pensions of its retiring employees. In 2004, under the visionary leadership of Atal Bihari Vajpayee, a historic reform in the pension sector was introduced, ushering in a new era of modern economic governance. The New Pension Scheme (NPS) shifted India’s pension system from a non-contributory model to an annuity-based, contributory program, making it more sustainable for future generations.
This reform reflected Atal Bihari Vajpayee’s belief in “simple living, high thinking,” and his commitment to modernization that benefits both individuals and the nation. The NPS allowed for greater fiscal responsibility while giving employees more flexibility and control over their retirement planning.
From the introduction of the NPS under Atal Bihari Vajpayee to the recent shift towards the Universal Pension Scheme (UPS) under the visionary leadership of Prime Minister Narendra Modi, the focus has always been on adapting to the changing needs of the nation. Narendra Modi’s forward-thinking reforms have ensured that India remains on a path of long-term, progressive economic development, empowering citizens while securing the country’s financial future.
UPS – Path to Fiscal Sustainability and Dignity
Pension is a significant social security tool to ensure a dignified retirement to the public servants. In the recent past, Congress and other opposition parties have heavily politicised the issue of pension during elections. In States such as Rajasthan, Chattisgarh, and recently Haryana, the Congress government has made election promise of reverting back to the Old Pension Scheme, but failed miserably upon implementation. While the Old Pension System (OPS) offered a fixed 50 percent amount of last drawn basic pay, it came with a high cost on the public exchequer due to its non-contributory and unfunded nature. As the government did not have to immediately contribute to the fund, State government justified it as a measure to save money. However, the burden fell on the future government and led to several fiscal trickle-down risks.
Back home in Telangana, Congress has been advocating for a return to OPS. However, data shows that approximately 35 percent of state revenue receipts are allocated to employee salaries and pensions. This allocation leaves limited resources for essential welfare schemes. Additionally, the state faces a significant debt of Rs 6.71 lakh crore accumulated over the past decade, with a fiscal deficit projected at Rs 49,255.41 crore in the 2024-25 budget. This rising debt, driven by heavy borrowing, poses a serious risk to fiscal sustainability.
Due to the increasing deficit, the State is increasingly relying on RBI’s Ways and Means Advances (WMA). Over the years, there has also been a significant rise in the use of the Overdraft facility by Telangana, increasing from 5 days in FY 2017-18 to 121 days in FY 2022-23. Since both of these facilities incur much higher interest rates, the State’s overall interest expenses have risen considerably. In such a state of fiscal health, if Telangana reverts to OPS, this is going to have significant costs on the welfare of the people.
As per RBI, implementation of OPS raises the fiscal expenditure by 4.5 percent and a cumulative burden reaching by 0.9 per cent of GDP annually by 2060. This also restricts the scope of capital expenditure for the government. Studies by economist[2] of various state budgets from 1990 to 2020 reveal that reverting to OPS would likely reduce development expenditure, exacerbating inequality and hindering economic growth. To cover the increased costs under OPS, governments might resort to higher taxes and borrowing. Such borrowing reduce private sector investment, impeding overall economic growth.
In contrast, UPS offers a balanced, fiscally sustainable and progressive approach. It provides a robust pension system that supports employees while maintaining economic stability. Under UPS, employees receive a guaranteed pension upto 50 percent of their average basic pay along with necessary inflation indexation. While the employees will contribute 10 percent, the government’s contribution is likely to increase from 14 percent to 18.5 percent.
Thus, it is a ‘best of both worlds’ model which guarantees benefits and protection against inflation while avoiding financial strain on employees. The core idea is that neither taxpayers nor future employees should have to bear the costs of past services rendered by previous generations, while simultaneously also guaranteeing the right to a dignified retirement to its public servants. This in turn provides for provide genuine dignity and a commitment to long-term and effective governance and hence the scheme has been welcomed by several unions and interest groups as a forward-looking solution.
Way Forward
By offering a comprehensive and supportive retirement plan, the UPS Scheme aims to secure a brighter financial future for all participating employees. As Prime Minister Narendra Modi stated – “Our government’s focus is on ensuring that the benefits of our pension schemes reach the most vulnerable and elderly. This reflects our commitment to social justice and inclusive growth.” Thus, the UPS Scheme is a step in the right direction to secure a balance between equity and welfarism with pragmatism. It offers a compelling promise for employees, ensuring a secure and comfortable retirement while also ensuring inter-generational fiscal equity.
The people of Telangana must recognize the superior benefits of the UPS Scheme compared to the OPS and hold the current government accountable for its implementation. It is imperative that all political parties and state governments work together to adopt this scheme effectively. Coordinated efforts across states are essential to ensure that the UPS not only supports economic stability and provides dignified retirements but also upholds a responsible approach to taxpayer welfare.
Progressive citizens, intellectuals, and thinkers of Telangana are urged to unite in shaping policies that promise a brighter future for the next generations. Together, we can enhance the welfare of both Union and State government employees, driving holistic development and fiscal sustainability for all.
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