Old Pension Scheme (OPS) Vs New Pension Scheme (NPS)

Context:

• This article is based on the news “It is time for India’s 97% to speak up against the Old Pension Scheme” Which was published in the Live Mint. 
• The ongoing state elections have intensified the political conflict surrounding the choice between maintaining the National Pension System (NPS) and returning to the Old Pension Scheme (OPS).

States Reverting From New Pension Scheme to Old Pension Scheme

• Recently, states including Rajasthan, Jharkhand, Chhattisgarh, Himachal Pradesh, and Punjab have opted to move back to the old pension system.
• The government is planning to amend the NPS so that employees get an assured 40%-45% of their last drawn salary as a pension.
• The National Democratic Alliance (NDA) government discontinued the OPS in 2004 and introduced the National Pension Scheme (NPS) for government employees. 

Enroll now for UPSC Online Course

Comparing and Contrasting the Old Pension Scheme and the New Pension Scheme 

• Advantages of OPS over NPS/ Disadvantages of NPS: 
  • It ensures a consistent source of income throughout an individual’s retirement years.
  • This is because their pensions are calculated based on their final salary along with the DA.
  • Thus, their pensions increase whenever the DA is revised semi-annually. The OPS income that the recipient gets is not subject to tax.
  • The pension of employees increases when the DA is revised semi-annually.
  • No deductions are made from employees’ salaries for pension contributions.
  • The government bears the costs associated with pension expenditure.
• Advantages of NPS over OPS/ Disadvantages of OPS:
  • It enables subscribers to choose their preferred fund manager and investment choice, including a 100% government bond option. 
  • The lowering of government retirement obligations.
  • Greater returns than traditional instruments like the Public Provident Fund (PPF).

What are the challenges associated with the Old Pension Scheme?

• Pension liabilities: There continue to be concerns that the OPS will soon become financially unsustainable because there is no means to fund the growing pension liability with the existing tax buoyancy. 
  • As of 2021-22, state pension liabilities represent 1.2% of GDP.
  • In the 10 States, pension spending alone amounts to 12.4% of total revenue expenditures (on average from 2017-18 to 2021-22) and it is predicted that the pension outlay will remain between 0.7% and 3% of GSDP through 2030-31.
  • The NPS replaced the OPS which encouraged early retirement and underutilization of personnel resources. 
• Demographic changes in the Indian Population: Governments are expected to face increasing pension obligations in the future, driven by factors like rising life expectancy, periodic DA increases, and salary-linked pensions.
  • The increase in the elderly population and their life span means an increase in liabilities. 
  • The increase is two-fold, as the pensioners’ benefits also increase every year, like the salaries of existing employees, because they are indexed for dearness relief. 
• Fiscal implications: The government is already heavily burdened with non-discretionary expenditures towards interest payments, salaries, and administrative expenses. 
  • Indexed pensions for government employees can significantly add to this bill, crowding out productive spending and welfare schemes for the wider population.
  • According to a recent study by the RBI, the burden of switching back would be roughly 4.5 times that of the NPS, “with the additional burden reaching 0.9 per cent of GDP annually by 2060”.
• Impact on social sector expenditure: With India’s median age rising and an older population structure in many states, public education, and healthcare are vital to harnessing the demographic dividend.
  • This reduces the fiscal resources required to undertake developmental expenditure.
  • OPS-based recruitment poses expenditure challenges, leading to reduced social sector spending and worsening poverty among the marginalized.
• Deepening Intergenerational Equities: It negatively impacts fairness between generations as it places the burden of funding pensions for retirees on future workers through taxes.
  • Currently, the bottom 50% of the population bears the burden of indirect taxation six times more than their income. 
  • The OPS can be seen as a redistribution mechanism that benefits those who are already in a better financial position.
  • Government employees receive a minimum pension of ₹9,000 based on the Sixth pay norms. 
  • On the other hand, the social security pension for the poor does not exceed ₹500 in 14 States and is only ₹2,000 in a few other States.
  • This means that a government employee’s salary is higher than the income of over 90% of the population. 
  • Intergenerational equity refers to fairness or justice in relationships between children, youth, adults, and seniors, particularly in terms of treatment and interactions.

What are the concerns associated with the New Pension Scheme?

• Pension Unpredictability: The pension payout depends on the market returns on the corpus, which is mostly invested in federal debt.
  • It also leaves the employees with less disposable income as they too have to contribute under this scheme.
  • Given the growth in salary and other advantages accorded by the private sector, in the future, the unpredictability of the NPS may dissuade many talented individuals from entering the government sector.
• Fund management: The public is of the view that their fund would not be secure in the hands of fund managers, and their pensions may be reduced. 
• Lack of flexibility of contributions: In contrast to private sector employees who have the flexibility to adjust their NPS contributions, government employees are obligated to contribute 10 percent of their monthly pay.
• Investment in annuity plans: The NPS requires a mandatory 40% allocation of maturity proceeds to purchase an approved annuity plan, which entails locking in hefty premiums for life and yielding meager returns of 5-5.5%, subject to taxation.

Way forward 

• Participatory pension system: By maintaining the employees’ contribution component, the scheme can incorporate increased government contributions.
  • It should include a commitment to step in when returns fall short of ensuring the mandated minimum pension.
  • A similar proposal was put forth by Andhra Pradesh which upholds the contributory nature of the NPS while guaranteeing a minimum of 33% of the basic pay.
  • This could be adapted to the needs of other States.
• Guaranteed monthly return: To shield employees from the uncertainties of the market, the government should modify the NPS to offer a guaranteed monthly return. 
  • Current returns show employees get around 38% of their last salary as a pension.
• Optional government contributions:  The employee contributions should be made optional even as the government continues its 14 per cent contribution to the scheme. 
• Guaranteed pension:  This should be similar to the OPS which is 50% of your last pay drawn, which is inflation indexed, but with contributions from the employees. 
• Fixed return scheme for NPS subscribers: The government can consider offering a fixed return scheme for NPS subscribers to park their money at maturity. 
  • The scheme can offer an inflation-plus fixed return. This will address the concerns related to the unpredictability of pension amounts.
• Administrative reforms: They are needed to address disparities in pay among different employee ranks.
  • Government employees with access to decision-making processes should advocate for rationalizing the pension plans and excessive spending of political executives.
  • They should advocate for a fairer allocation of resources and the broadening of universal access to public services. 
  •  They should promote progressive taxation for the top 10% of wealth holders to address poverty and the widening wealth gap. 

Enroll now for UPSC Online Classes

Conclusion:

The ongoing discussion about whether to stick with the old pension system or adopt the new one in India boils down to ensuring retirees have a steady income versus managing the government’s financial burden, with a need for a balanced solution that addresses both concerns.

DOWNLOAD PDF