A bad guarantee rajasthan’s move to revert to defined benefit pensions is imprudent and unfair

A bad guarantee rajasthan’s move to revert to defined benefit pensions is imprudent and unfair

Rajasthan government’s budget proposal on guaranteed pensions turned the clock back on two decades of pension reform. It’s a bad idea that threatens to spread as a similar promise is one among the many made during the campaign for UP’s assembly elections. The backstory to pension reform is that GoI’s budget for 2001-02 highlighted the unsustainable nature of guaranteed pensions. Following groundwork by experts, the National Pension System (NPS) was introduced by GoI on January 1, 2004 for its employees, with states being given the option of following suit. Rajasthan did so immediately.

There are two fundamental differences between the old pension scheme (OPS) and NPS. The former is linked to the last pay drawn by the e[kmployee and is guaranteed by the government, making it a defined benefit system. In NPS, there are no guarantees. A defined contribution of an employee is invested in regulated financial instruments and the pension is tied to market performance. A shift to NPS eased the pressure on both GoI and states. Moreover, it created space for spending on other welfare measures. Therefore, Rajasthan’s decision to go back to OPS carries the risk of crowding out other welfare and investment spending to favour government employees.

India’s military pensions continue to follow OPS. The reallocations within the defence budget provide an insight into the impact of guaranteed pensions. The 15th Finance Commission’s report showed that defence pension relative to defence expenditure increased from 17.6% in FY-12 to 25.2% in FY-19. During the same period, defence capital outlay declined from 31.8% to 23.6% of defence expenditure. Rajasthan’s chief minister Ashok Gehlot should roll back this announcement in wider public interests. In an uncertain world, guaranteed payouts will end up reallocating public resources from the needy to a relatively better off section of society.