Rajasthan's terrible pension scheme plan

The Rajasthan government's announcement to revert to the old pension scheme to provide assured returns to employees makes no sense. Ending the contribution-based pension system will raise the burden of pension on government finances, and crimp development spending. Already, the pandemic has pushed up borrowings of GoI and states. Such populism sets a terrible precedent for other states. The Samajwadi Party has already promised to restore the old pension scheme if it returns to power in Uttar Pradesh. The raison d'etre of the National Pension System (NPS), which manages pensions of central and state government servants who joined in or after 2004, was to rein in the government's growing pension liabilities. That will be defeated if the government gives a guaranteed return. Instead, it should enhance returns from NPS, which houses ₹5.62 lakh crore, and ensure that it offers old-age security certainty.

An employee contributes 10% of her pay and dearness allowance. The matching contribution by the state or central government has been raised to 14% to help enhance the corpus. As the pool of funds increases, fund managers will have more flexibility to diversify deployment across asset classes and try to balance their portfolios to optimise risk and reward. NPS has the institutional framework to generate superior returns. The three-year return for government employees, who have the option to invest up to 50% in equities, is about 10.6%. Superior returns will help employees build a decent retirement nest, and make long-term capital available for infrastructure funds.

States will spend over ₹4 lakh crore on pensions in FY2022. Abandoning NPS will cripple state finances. Rajasthan must scrap this regressive proposal.