Reverting to old pension scheme will be catastrophic, says Economic Advisory Council

Reversal to the old pension scheme (OPS) will have a catastrophic impact on the poor population and will crowd out private investments in the states that move away from the new pension scheme (NPS) to OPS, the Economic Advisory Council to the PM said.

“Going back to the OPS will worsen inequality and lower economic growth in the states,” EAC-PM member Shamika Ravi said in a working paper co-authored with Mudit Kapoor of Indian Statistical Institute.

Based on their analysis of state budgets of thirty years from 1990 to 2020, the authors said that reversing to the OPS would result in a reallocation of resources away from the state’s development expenditure, which benefits the poor, and towards a much smaller group of people who have benefitted from a secured and privileged job throughout their working life.


“Given that economic services such as infrastructure and rural and urban development were affected more severely than social services, it would reduce the productivity of the poor, further diminishing their future economic prospects,” they said.

According to the paper, the analysis shows that the increased state borrowing to finance non–development expenditure was effectively crowding out private investment.

“Resources that would otherwise have been available to the private sector for investment and fostering growth were now being spent for the consumption benefits of the few privileged retired public sector employees,” they said suggesting that state governments, over and above the financial feasibility of the OPS, would need to think hard about its impact on the poor and vulnerable, particularly women and children.

The paper suggested that the key mandates for the next Finance Commission could be to determine the long-term economic viability of public pension programs in India.

Citing the example of Himachal Pradesh and Punjab where pensions as a percentage of development spending accounts for 37% and 31% respectively and are among the highest anywhere, the authors said that reversal to the old pension scheme in these states will most certainly have a catastrophic impact on their poor populations.

“The reversal will deprive the poor of essential services such as health and education,” it said. “It also prevents them from participating in growth opportunities when resources are reallocated from the infrastructure needs of the poor to the excessive consumption of the privileged few,” it added.

Talking about the need for administrative efficiency at the level of states, the paper suggests NITI Aayog to create a knowledge sharing platform where states with high administrative efficiency can disseminate the best practices to lagging states.

“The primary focus should be to document the incremental and micro changes that states have initiated to gain greater efficiency such that other states can learn and adapt to their conditions,” it added.