The central government is planning to implement some changes in the pension system for its employees. Currently, employees contribute 10 per cent of their salary to a pension scheme and the government contributes 14 per cent and this contribution gets invested in governmental debt. The eventual pension payout depends on the returns from these investments which purely depends on market conditions.
While the government introduced a new pension policy, some states returned to the old pension system, which guarantees a fixed pension of 50 per cent of the employee’s last drawn salary without any contribution required from the employee. The older system, however, puts a strain on the government’s finances. These states include Chhattisgarh, Himachal Pradesh, Rajasthan, Jharkhand and Punjab.
To address this financial strain, the government plans to amend the current pension system. Under this, both employees and the government will continue to contribute, but employees will be guaranteed a pension equivalent to 40 per cent to 45 per cent pension of their last drawn salary. The government does not intend to revert to the old pension system.
The government aims to satisfy the states who returned to the old system, by creating a financially sustainable pension scheme for all.
The amended pension system will have a smaller impact on the government’s budget. Currently, employees typically receive 38 per cent of their last salary as pension which depends on the market returns but if the government guarantees a 40 per cent return, it would only need to cover a 2 per cent shortfall.
By assuring a 40 per cent return and having the probability of covering a 2 per cent shortfall, the government aims to create a balance by providing a reasonable pension to employees and managing the fiscal impact on its budget. However, if the market returns on pension investments decline further, the government’s expenditure may correspondingly increase to cover the shortfall.