In calculating the states loan entitlement, any amount paid by the state government and the employee to the PFRDA is permitted as an additional loan fund, referred to as the adjustment of pension funds (PFA). Hence, the states that remain part of the National pension system, can borrow an additional amount beyond the permitted limit of 3% of the GSDP. The PFA extension takes into account both the employer’s and the employee’s contribution, which means the contribution of the state and employees. While government employees provide 10% of their salary as a share of NPS extensionmost states except those like Rajasthan had raised the employer’s share to 14% of employees’ salary.
Opposition-ruled Rajasthan, Chhattisgarh, Himachal Pradesh, Jharkhand and Punjab who have opted out of NPS and reverted to the old Defined Benefit Pension Scheme – which offers 50% of final salary as a monthly post-retirement payment – will be denied the permit for additional loan in 2023-24.
Lower borrowing will be of particular interest to states such as Punjab, which is among the most fiscally struggling along with Rajasthan. In fact, Punjab had requested the Center’s help for several thousand crores, claiming that it is a border state.
“We have neutralized the employer incentive. Those governments that are in NPS will get additional fiscal space. The pension fund adjustment is planned because it reduces the future liability of the state, including the employee component, because the old pension scheme has no employee contributions,” an official said.
The revival of the old pension scheme is a major concern for policy makers and economists as the pension liability is on the rise. It reduces the ability of states to allocate sufficient resources for crucial sectors, such as health and education or for building infrastructure.
While Manmohan Singh’s government convinced states to implement the NPS in 2005, it came as a surprise that Congress is now backtracking, with the policy of returning to the old pension scheme drawing criticism even from the former Urban planning commission President Montek Singh Ahluwalia.
The states that opted out are in a further bind as the pension regulator has refused to refund contributions paid by public employees and them, arguing that the law does not provide for it.
