Kerala’s Pension Dilemma: A Review of the Contributory Pension Scheme

From UPSC perspective, the following things are important :

Prelims level: Contributory Pension Scheme

Mains level: Read the attached story

Central Idea

A report on Kerala’s contributory pension scheme (introduced in 2013) has been released after a recent Supreme Court verdict.
This scheme, introduced in 2013, has sparked a debate due to its financial impact on the state.
Let’s take a closer look at the National Pension System (NPS), Kerala’s pension scenario, and the findings of the review committee report.

What is NPS? The National Pension System (NPS) is a contributory pension scheme initiated by the Indian government in 2004, extending to various states, including Kerala.
How It Works: Under NPS, a fund is built from contributions made by employees and employers during their employment. Unlike the previous pension scheme funded by the government, NPS involves purchasing an annuity scheme at retirement, providing the pensioner with an annuity.

Pension Challenges: Kerala faces rising pension liabilities, mainly due to a high life expectancy post-retirement and an increasing number of employees enrolled in NPS.
Budget Impact: The state allocates a significant portion of its budget to committed expenditure, including salaries, pensions, and interest payments. Pension accounts for 21% of this expenditure.
Contributions: Employees who joined after April 2013 contribute 10% of their salary (including dearness allowance) to the NPS corpus.

No Revocation Recommended: The review committee did not recommend scrapping the NPS, stating it was legally sound.
Alternative Recommendations: It suggested raising the state government’s contribution from 10% to 14% and including dearness allowance at 14%. The report also proposed allowing death-cum-retirement gratuity for NPS subscribers.

Long-Term Perspective: The committee viewed pension matters from a long-term perspective, stating that continuing NPS would eventually reduce pension outgo as a share of the state’s GDP.
Reducing Revenue Deficit: As pension outgo decreases, the share of revenue deficit also falls, freeing up resources for capital spending and social services.

Low Annuities: Retirees under NPS have reported receiving meager annuities compared to the old pension scheme.
Market Risks: Concerns exist about the impact of stock market crashes on NPS investments, as contributions are invested in various assets.
Demand for Reintroduction: Some states have reintroduced statutory pension schemes due to employee demand.

The review report favors retaining NPS in Kerala, emphasizing its long-term financial benefits.
However, concerns about low annuities and market risks persist, prompting some states to consider returning to the old pension scheme.
The debate over Kerala’s contributory pension scheme continues amid financial and welfare considerations.