The present regime’s introduction of the Unified Pension Scheme (UPS) in August 2024 has generated a mix of praise and criticism. As a hybrid between the Old Pension Scheme (OPS) and the New Pension Scheme (NPS), the UPS attempts to balance the demands for guaranteed pensions while addressing the fiscal concerns raised by the ever-growing pension liabilities. However, the scheme’s underlying implications raise several critical questions regarding its long-term sustainability and potential financial burden on future generations.
A Middle Path Between Two Extremes?
The UPS provides government employees with an assured, inflation-adjusted pension at 50% of their last-drawn basic pay, along with other features like periodic dearness relief hikes and a minimum pension of ₹10,000 per month. This scheme, which will be offered as an additional option under the NPS framework, requires employees to contribute 10% of their basic salary while the government increases its share to 18.5%. With 23 lakh central government employees expected to benefit from UPS, the scheme is set to be implemented from April 2025.
The UPS seems to be a smart compromise compared to the older schemes. On one hand, it addresses the demand for pension guarantees that were a hallmark of the OPS. On the other hand, it retains a contributory model, preventing the government from bearing the entire burden as was the case under the OPS. The scheme’s design, guided by actuarial models, suggests that the government has accounted for demographic factors, inflation, and expected returns while determining its financial outlay. The initial projection of an additional annual outgo of Rs 6,250 crore and arrears of Rs 800 crore, though significant, appears manageable at first glance.
The Return of Fiscal Risks
However, critics argue that the UPS may be a slippery slope back to the fiscal irresponsibility that characterized the OPS era. The OPS was notorious for its pay-as-you-go model, which left pension liabilities entirely in the hands of the government, ultimately funded by taxpayers. It was this unsustainable model that prompted the shift to the NPS in 2004, which linked pensions to market returns and involved both employees and the government making contributions.
The UPS, while designed to balance contributions, still reintroduces elements of guaranteed pensions that could strain public finances in the long run. The government’s contribution of 18.5% is based on assumptions related to workforce size, life expectancy, and inflation rates. Any significant deviation from these assumptions could inflate the fiscal burden, especially when the scheme is extended to state governments, potentially covering 90 lakh employees. States already grappling with high debt levels may find it challenging to sustain this additional liability.
Impact on Broader Fiscal Discipline
The broader concern is the precedent the UPS sets. By offering guaranteed pensions, the scheme may encourage states and other entities to abandon fiscally prudent approaches in favor of populist measures. Several opposition parties, when in power in states like Rajasthan and Chhattisgarh, have already reverted to the OPS, highlighting how political pressures can outweigh fiscal rationality.
The Rs 5.22 lakh crore allocated for pensions by states in 2023-24, representing 6%-21% of their revenue receipts, underscores the existing strain on public finances. The UPS could exacerbate these pressures if other states follow suit.
Moreover, while the scheme is targeted at government employees, who make up only 2% of India’s workforce, it is ultimately the broader taxpayer base that bears the cost. Critics argue that social security measures should be aimed at a wider segment of society, particularly the unorganized sector, which lacks adequate pension coverage. By prioritizing a relatively small and organized group, the UPS may be seen as catering more to political interests than addressing systemic issues of social security.
The Politics behind the Policy
The rollout of the Unified Pension Scheme (UPS) just before key elections in Delhi, Bihar, Maharashtra, Haryana and Jharkhand suggests it may be politically driven rather than a genuine reform. By focusing on government employees, a crucial voter base, the scheme seems aimed at securing electoral support. Critics note the irony of the BJP, which once backed the market-oriented National Pension Scheme (NPS) in 2004, now shifting towards aspects of the Old Pension Scheme (OPS). Opposition leaders argue that this shift prioritizes electoral gains over fiscal prudence, as state pension liabilities are already over Rs 5.22 lakh crore. Expanding UPS could burden public finances further, and concerns remain that it may divert more public funds into capital markets, benefiting fund managers more than employees. Ultimately, the UPS risks being perceived as a politically motivated rollback rather than a thoughtful policy reform.
A Prudent Move or a Policy Misstep?
The Unified Pension Scheme is undeniably a well-calibrated attempt to bridge the gap between fiscal prudence and political reality. Yet, the very elements that make it appealing — guaranteed pensions, inflation adjustments, and a higher government contribution — also introduce the risk of long-term financial instability. While the UPS may offer a short-term political advantage and satisfy a vocal constituency of government employees, its long-term sustainability remains uncertain.
The Unified Pension Scheme aims to strike a balance between guaranteed pensions and fiscal prudence, but it risks returning to unsustainable practices of the past. Its long-term impact on public finances remains uncertain, raising questions about whether this move represents genuine reform.
Dr. Prashant Kumar, Assistant Professor of Law, MATS University, C.G & Dr. Madhulika Mishra, Assistant Professor of Law,GLA University, UP