Concerns with NPS implementation

What is the issue? 

Though the NPS was a fiscally expensive solution, deviating from it imposes very large costs on the exchequer.

How does the pension policy evolve in India?

• The traditional civil servants pension was a defined benefit at about half the wage at retirement.
• In the 1990s, there was an explosive trajectory of sharp growth in pension expenditures.
• Particularly with the armed forces and the railways, pension payments were growing much faster than wage payments.
• Thus, the Ministry of Finance and the Asian Development Bank funded a household survey through which the number of civil servants and pensioners was estimated.
• The survey estimated that the implicit pension debt was about 65% of GDP.
• The Ministry of Social Justice created Project OASIS in 1999.
• Under that, a National Pension System was created, which proposed a 10% wage hike to civil servants to ensure consistent contribution of pension amount from them.
• All recruits of the government from January 1, 2004, were to be placed into the NPS.
• However, it was only in 2013 that the law was passed, and the Pension Fund Regulatory and Development Authority became a statutory regulator of the service providers.

What are the concerns?

• Unlike many pension reforms elsewhere in the world, there was no decline in pension payments to existing workers or pensioners.
• This has made the NPS a fiscally expensive reform for the government.
• This is because, the government is paying contributions to both new workers (with a 10% wage hike) and pensions to those hired earlier.
• Only, when employee hired prior to January 1, 2004 was dead, the government can avoid contributing to them and derive the fiscal benefits.
• Also, in the early days of NPS reform, the armed forces were always part of the plan.
• The idea was that NPS implementation for armed forces would be done after the institutional structures were working for civil servants.
• However, this was not carried through and hence demands for “one rank one pension” were erupted later by the armed forces.
• Upon its implementation, the revenue expenditure of the government has increased further and weakened its fiscal capacity.
• All these expenditures fall under the off-balance-sheet liabilities of the Indian state.

What should be done to reduce off-balance sheet liabilities?

• A bond market with voluntary buyers, along with the Public Debt Management Agency (PDMA), should be encouraged.
• The PDMA will engage with buyers of bonds and will bring the bond market perspective into the policy process.
• This will reduce the concern of voluntary buyers of bonds regarding the fiscal stress of the economy in the long term.
• In turn, it will increase the capital receipts of the government along with ensuring checks and balances on each of its policy decisions.

Source: Business Standard