Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Old Pension Scheme and related issues

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Pension Scheme

Mains level : Pension reforms in India

Some political parties are promising to switch to the Old Pension Scheme in the opposition-ruled states.

Old Pension Scheme

  • Pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay.
  • The attraction of the Old Pension Scheme or ‘OPS’ — called so since it existed before a new pension system came into effect for those joining government service from January 1, 2004.
  • It was hence described as a ‘Defined Benefit Scheme’.
  • To illustrate, if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000.
  • Also, like the salaries of government employees, the monthly pay-outs of pensioners also increased with hikes in dearness allowance or DA.

What were the concerns with the OPS?

  • Liability remained unfunded: There was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
  • Usual budgetary allocation: The Union budgetary allocations (Rs 3,86,001 crore in 2020-21) provided for pensions every year; there was no clear plan on how to pay year after year in the future.
  • Burden on working class: The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
  • Far extended pay-outs: Better health facilities would increase life expectancy, and increased longevity would mean extended payouts.

What was planned to address this situation?

Ans. Oasis Project

  • In 1998, the Union Ministry of Social Justice and Empowerment commissioned a report for an Old Age Social and Income Security (OASIS) project.
  • Its primary objective was targeted at unorganised sector workers who had no old age income security.
  • The OASIS report recommended individuals could invest in three types of funds to be floated by six fund managers:
  1. Safe (allowing up to 10 per cent investment in equity),
  2. Balanced (up to 30 per cent in equity), and
  3. Growth (up to 50 per cent in equity)
  • The balance would be invested in corporate bonds or government securities.
  • Individuals would have unique retirement accounts, and would be required to invest at least Rs 500 a year.

Alternative to OPS: New Pension Scheme

  • The New Pension System was proposed by the Project OASIS report; it became the basis for pension reforms.
  • It was originally conceived for unorganised sector workers, was adopted by the government for its own employees.
  • The NPS for Central government employees was notified on December 22, 2003.
  • Unlike some other countries, the NPS was for prospective employees — it was made mandatory for all new recruits joining government service from January 1, 2004.
  • The defined contribution comprised 10 per cent of the basic salary and DA by the employee and a matching contribution by the government — this was Tier 1, with contributions being mandatory.
  • In January 2019, the government increased its contribution to 14 per cent of the basic salary and dearness allowance.
  • Schemes under the NPS are offered by nine pension fund managers — sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max.

Risk profiles under NPS

  • NPS is now regulated under the Pension Fund Regulatory & Development Authority (PFRDA) Act, 2013.
  • The risk profiles of various schemes offered by these players vary from ‘low’ to ‘very high’.
  • The 10-year return for the NPS Scheme-Central Government floated by SBI, LIC, and UTI stood at 9.22 per cent; the 5-year return at 7.99 per cent, and the 1-year return at 2.34 per cent.
  • Returns on high-risk schemes could be as high as 15 per cent.

Issues with OPS

  • Burden on exchequer: In 30 years, the cumulative pension bill of states has jumped to Rs 3,86,001 crore in 2020-21 from Rs 3,131 crore in 1990-91.
  • Huge share of tax receipts: Overall, pension payments by states eat away a quarter of their own tax revenues. If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts.
  • Issue of inter-generational equity: Today’s taxpayers are paying for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels. It means the pension of someone who retired in 1995 may well be the same as that for someone who retires in 2025.

Why states are reverting back to OPS?

OPS brings state governments some short-term gains:

  • Deferment to contribution: They save money since they will not have to put the 10 per cent matching contribution towards employee pension funds.
  • Low curtailment in salaries: For employees too, it will result in higher take-home salaries, since they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.
  • Old age security: Some government employees are concerned that their pension may not be the same as 50 per cent of their last salary drawn (as in the OPS).

Why need pensions at all?

  • Pension helps you accumulate a part of your income, over a long period, so that this money can be used post-retirement.
  • They provide a steady source of income when one needs the most.
  • It helps inculcate fiscal discipline.

Conclusion

  • NPS vs. OPS will play out in the Himachal Assembly elections with freebie trending parties considering following the same trend as Rajasthan, Chhattisgarh and Jharkhand.
  • The fiscal risks involved in the transition of NPS-borne employees to OPS regime are substantive and to a great extent unsustainable keeping in view the existing share of pensionary liability in government expenditure.
  • It is estimated that the cost incurred by the government on pension is more than double the cost of NPS contribution in the long run.

 

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