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Old Pension Scheme vs National Pension Scheme

Context:

The Reserve Bank of India (RBI) has cautioned states against reverting to the old pension scheme (OPS), which was in vogue till 2004, stating that it will add to the fiscal burden of States in the coming years.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. What did RBI say about the old pension scheme?
  2. Reasons for states switching to the Old Pension Scheme (OPS)
  3. Old Pension Scheme vs National Pension Scheme

What did RBI say about the old pension scheme?

  • The Reserve Bank of India (RBI) has warned about the potential risks of some states reverting to the old pension scheme.
  • In its “Report on State Finances,” the RBI stated that the move to revert to the old scheme would only result in short-term savings for states, but could lead to the accumulation of unfunded pension liabilities in the future.
  • According to budget estimates for 2022-23, states are expected to see a 16% increase in pension expenditure, reaching Rs 463,436 crore in 2022-23 compared to Rs 399,813 crore in the previous year.
  • The compounded annual growth rate (CAGR) in pension liabilities for the 12 years ended FY22 was 34 per cent for all the state governments, according to an SBI Research report.

Reasons for states switching to the Old Pension Scheme (OPS)

  • The Reserve Bank of India (RBI) has warned that more states are opting to switch to the old pension scheme (OPS) instead of the National Pension Scheme (NPS). After Rajasthan, Chhattisgarh, Jharkhand and Punjab, Himachal Pradesh has also announced its intention to switch to OPS.
  • States have found it more convenient to pay old pensioners with the money collected from serving employees.
  • Under the OPS, retired employees receive 50% of their last drawn salary as monthly pensions. However, this scheme is considered fiscally unsustainable, and state governments do not have the money to fund it.
  • The OPS had no accumulated funds or stock of savings for pension obligations and was a clear fiscal burden.
  • The scheme is often attractive to political parties because it benefits the current aged population, even if they did not contribute to the pension kitty, according to the SBI Research report.

Old Pension Scheme vs National Pension Scheme

Old Pension Scheme (OPS)
  • An old pension scheme (OPS), commonly known as the PAYG scheme, is defined as an unfunded pension scheme where current revenues fund pension benefits.
  • Under this scheme, the contribution of the current generation of workers was explicitly used to pay the pensions of existing pensioners.
  • The scheme has been discontinued in most countries before the 1990s as it creates problem of pension debt sustainability, an ageing population, an explicit burden on future generations and the incentive for early retirement as the pension is fixed at the last drawn salary.
National Pension Scheme (NPS)
  • NPS is a defined contribution pension scheme. It enables an individual to undertake retirement planning while in employment.
  • With systematic savings and investments, NPS facilitates the accumulation of a pension corpus during their working life. It is designed to deliver a sustainable solution of having adequate retirement income in old age or upon superannuation.
  • NPS is mandatory for central government employees joining services on or after January 1, 2004, and almost all state governments have adopted it for their employees. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
  • Under NPS, employees contribute 10% of their salary (Basic + Dearness Allowance) and the government contributes 14% towards the employees’ NPS accounts.
  • As of December 2022, 59.78 lakh state government employees are part of NPS, with total assets under management of Rs 4.27 lakh crore.

-Source: Indian Express


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