OLD PENSION SCHEME – POLITY

OLD PENSION SCHEME – POLITY

News: Should States revert to the Old Pension Scheme?

 

What's in the news?

●       The National Pension Scheme (NPS) was launched in 2004. While the older pension scheme offered defined benefits to all government employees without any contribution on their part, the NPS requires employees to contribute a sum throughout their working years.

 

Key takeaways:

●       Almost two decades after the NPS came into effect, several States are switching back to the Old Pension Scheme (OPS).

●       Earlier this year, the Central government set up a committee under the leadership of the Finance Secretary to review the working of the NPS and evolve an approach that addresses the needs of government employees while maintaining fiscal prudence.

 

Old Pension Scheme or Defined Pension Scheme:

●       The scheme assures life-long income, post-retirement, usually the assured amount is equivalent to 50% of the last drawn salary.

●       The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.

 

 

Difference between Old Pension Scheme and New Pension Scheme:

 

Old Pension Scheme

New Pensions Scheme

  1. Defined pension scheme
  2. No need of contributions from employees
  3. Pension is based on the last drawn salary and length of service.
  4. Upon retirement, employees receive 50% of their last drawn basic pay and dearness allowances or their average earnings in the last ten months of service, whichever is more advantageous to them.
  5. Entire expenditure under OPS was borne by the government.
  6. Only government employees were eligible for OPS
  1. Contributory pension scheme
  2. Employer and employee contribute their respective shares
    1. Employee’s contribution is 10% of their basic salary
    2. The government’s contribution is 14%
  3. NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA)
  4. National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.
  5. NPS id market based returns over long term
  6. It not only covers government employees but also covers private sector employees.
  7. Age limit: 18 years to 70 years
  8. The funds are then invested in earmarked investment schemes through Pension Fund Managers.
  9. Schemes under the NPS are offered by nine pension fund managers
    1. It is sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max.
  10. At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.

 

Issues with Old Pension Scheme:

1. No specific corpus:

●       The main problem was that the pension liability remained unfunded, that is, there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.

●       The pay-as-you-go scheme created inter-generational equity issues meaning the present generation had to bear the continuously rising burden of pensioners.

2. Unsustainable:

●       Pension liabilities would keep climbing since pensioner's benefits increased every year - like salaries of existing employees, pensioners gained from indexation, or what is called ‘dearness relief’ (the same as dearness allowance for existing employees).

●       Better health facilities would increase life expectancy, and increased longevity would mean extended payouts.

3. Burden on centre and states:

●       Over the last three decades, pension liabilities for the Centre and states have jumped manifold.

●       In 1990-91, the Centre’s pension bill was ₹3,272 crore and the outgo for all states put together was ₹3,131 crore. By 2020-21, the Centre’s bill had jumped 58 times to ₹1,90,886 crore for states; it had shot up 125 times to ₹3, 86,001 crore.

4. Bad economics and bad politics:

●       In 30 years, the cumulative pension bill of states has jumped to ₹3,86,001 crore in 2020-21 from ₹3,131 crore in 1990-91. 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.

5. Inter-generational equity:

●       There is also the larger issue of inter-generational equity.

●       Today’s taxpayers are paying for the ever-increasing pensions of retirees.

 

Why are states shifting back to OPS?

OPS brings state governments some short-term gains such as

1. Deferment to contribution:

●       They save money since they will not have to put the 10 percent matching contribution towards employee pension funds.

2. Low curtailment in salaries:

●       For employees too, it will result in higher take-home salaries, since they too will not set aside 10 percent of their basic pay and dearness allowance towards pension funds.

3. Old age security:

●       Some government employees are concerned that their pension may not be the same as 50 percent of their last salary drawn (as in the OPS).

4. Party politics:

●       These moves may be considered convenient by opposition parties as they struggle to expand their reach in the current environment.

 

States will benefit in the short term, but as pension liabilities rise over time, there will be less room for more productive spending.

 

WAY FORWARD:

1. Optimize pension schemes:

●       The government can optimize pension schemes by reviewing the benefits and eligibility criteria of the pension schemes.

●       This can help identify areas where the benefits can be reduced without impacting the employees.

2. Increase efficiency in government operations:

●       The government can also work towards increasing efficiency in its operations and reducing the overall workforce.

●       This can help reduce the pension burden and improve the fiscal health of the country.