The debate between New pension scheme and Old pension scheme is a constant feature in public discourse but what is not being highlighted is the impact of running two schemes together on the financial health of government organizations. Technically speaking, any employee who enters government after 1 January 2004 will be covered under New pension scheme and going by this, it means that government departments have now migrated successfully to New pension scheme but what happened to Old pension scheme? Have we exited the Old pension scheme totally while entering into New pension scheme? The answer is no. In fact, government is running both the schemes together which is having deep impact on financial health of government organizations keeping them under perpetual pressure to fund their revenue expenses.
Government pension Budget today reflects two components: one, the current pension of past employees and second, the future pension of current employees .So, Government is today paying both the pensions of current employees who are enrolled after 2004 and of those , who are enrolled before 2004.This decision is playing havoc with public finances as the pressure of these two components is squeezing the ability of government to run its day to day show. This problem is present across all the government departments whether they are under the control of state or centre and interestingly, the matter has never been examined on how it will be resolved. The most colloquial answer to such a question is that government is inefficient and it should reduce expenditure but have we seen any private organization running two different schemes at the same time?
There can never be two fundamentally different system running parallelly especially when one is designed on cash-basis and other one on accrual basis. The Old pension scheme in India was being run on cash basis. It does not mean that Old pension scheme can only be on cash basis. In fact, Old pension scheme and New pension scheme both can be run on accrual basis provided the future liabilities are properly calculated and present value of such liabilities are matched by equal amount of contribution by the organization in the same year. Unfortunately, prior to 2004, such contributions for future liabilities for Old pension scheme were never made and thus, there was no pension fund or assets available to discharge the liability incurred prior to 2004 but to be discharged after 2004.This concept was however rectified in New pension scheme where the organizations started contributing regularly to pension fund managed by PFRDA. To further decrease the liability , government also change the nature of pension scheme from Direct benefit to Contributory whereby employee has to also contribute to pension fund unlike Old pension scheme where no such contribution was to be made.
The biggest mistake government did was to not to migrate all the employees to New pension scheme and only limiting its scope to employees after 2004.To be precise, government had the option of terminating Old pension scheme for all the employees and migrate all to New pension scheme. This would have reduced the pain the government is undergoing because of double whammy which is being caused now. Let us take example of a government employee who entered the government in 1990 and is supposed to retire in 2010.Currently , such an employee is entitled to Old pension scheme even when NPS is there. However, government had another option available i.e. to end Old pension scheme for even such an employee, calculate his liability under Old pension scheme till 2004 and let him be a part of NPS after 2004.Thus, this would have ensured that government’s liability would have drastically fallen off right from 2004 rather than waiting for 2030 when the liabilities are likely to peak off.
In fact, government is now entering a phase of peak pension obligations both under Old pension scheme and New pension scheme which together is now composing 30 to 35 percent of revenue budget of state and central governments. This scenarios is not sustainable and shoring of any amount of tax or non-tax revenues is unlikely to solve this problem. The solution to this problem lies in resolving this double pension dilemma by delving deeper into pension liabilities and shoring up additional funds to discharge old liabilities so that organizations can focus on their desired goals rather than constantly worrying about pensions.