Reverting to old pension scheme by states will set off a fiscal time bomb - Times of India

Old Pension Scheme: Reverting to old pension scheme by states will set off a fiscal time bomb | Business – Times of India

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MUMBAI: The move by Rajasthan and Chhattisgarh state governments to stop providing for future pension liabilities by reverting to the pay-as-you-go (PAYG) old pension scheme will place an unsustainable debt burden on future generations. A report by State Bank of India has estimated the present value of future liabilities at 13% of gross domestic product if all states follow suit.
The impact will be felt from 2035 onwards when the present government employees retire and overall population dependency ratio increases from16% at present to 23% due to longevity and slowing down of population growth.
Shifting to the old schemes saves the state governments current expenditure as they pay only current pensions. A report by State Bank of India’s economics department has cautioned that this move is likely to have disastrous impact by triggering a race to the bottom with other states following suit. “If we assume that all states migrate to the old scheme, and assuming an entry level age of 28 years, with a 5% inflation indexation, the current present value of the implicit pension liabilities is around 13% of GDP, discounted by the current G-sec yield on 40 years. This is the implicit pension debt that will be unfunded as per the PAYG scheme,” the report authored by Soumya Kanti Ghosh, chief economist, SBI group said.
The reversion to the old scheme is a setback to years of reforms which started with the Oasis report in the late 90s which provided the framework for shifting to a funded New Pensions Scheme.
Questioning the viability of the PAYG scheme, the report said that the trends in the pension liability of the state governments over the long run shows a very sharp increase. “The CAGR in pension liabilities for the 12-year period ended FY22 was at 34% for all the state governments. As on FY21, the pension outgo as percent of revenue receipts is around 13.2% for all states combined and 29.7% of own tax revenue,” the report said.
Pension liabilities, salary payments and interest payments form 56% of state expenditures that is committed which is met out of state revenue receipts. In FY21, the total committed expenditures of states as a percentage of state own revenue receipts was at a staggering 125%. For larger states like Punjab, the committed expenditure is as high at 80%, followed by Kerala (73.9%) West Bengal (73.7%) and Andhra Pradesh (72.2%) as a % of state revenue receipts. “If we take the committed expenditure as a percentage of state own tax revenue, these numbers are higher by 149% -191% for these 4 states. Second, PAYG financing often masks the long-run cost of promised pension obligations. One way to estimate it is to quantify the present value of this future stream of expected benefits known as the “implicit public pension debt.”,” the report said.
Is the PAYG scheme fiscally viable? First, the trends in the pension liability of the state governments over the long run shows a very sharp increase. The CAGR in pension liabilities for the 12-year period ended FY22 was at 34% for all the state governments. As on FY21, the pension outgo as percent of revenue receipts is around 13.2% for all states combined and 29.7% of own tax revenue. In fact, 56% of expenditure of the states that is committed (interest payments, salary and pension payments) is met out of state revenue receipts. In FY21, the total committed expenditures of states as a percentage of state own revenue receipts was at a staggering 125%. For larger states like Punjab, the committed expenditure is as high at 80%, followed by Kerala (73.9%) West Bengal (73.7%) and Andhra Pradesh (72.2%) as a % of state revenue receipts. If we take the committed expenditure as a percentage of state own tax revenue, these numbers are higher by 149% -191% for these 4 states. Second, PAYG financing often masks the long-run cost of promised pension obligations,” the report said.



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