Congress has already reverted to the Old Pension Scheme in Rajasthan and Chhattisgarh, and AAP has said it would do the same in Punjab.
GS II: Polity and Governance
Dimensions of the Article:
- About Old Pension Scheme
- Concerns with the OPS
- What was the origin of the New Pension Scheme?
About 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 — lay in its promise of an assured or ‘defined’ benefit to the retiree.
- 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 payouts of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.
- DA — calculated as a percentage of the basic salary — is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living.
- DA hikes are announced twice a year, generally in January and July.
- A 4 per cent DA hike would mean that a retiree with a pension of Rs 5,000 a month would see her monthly income rise to Rs 5,200 a month.
- As on date, the minimum pension paid by the government is Rs 9,000 a month, and the maximum is Rs 62,500 (50 per cent of the highest pay in the Central government, which is Rs 1,25,000 a month).
Concerns with the OPS
The pension liability remained unfunded:
- There was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
- The Government of India budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
- The government estimated payments to retirees ahead of the Budget every year, and the present generation of taxpayers paid for all pensioners as on date.
- The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
The OPS was also unsustainable:
- For one, pension liabilities would keep climbing since pensioners’ 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).
- And two, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
- Over the last three decades, pension liabilities for the Centre and states have jumped manifold.
- In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore.
- By 2020-21, the Centre’s bill had jumped 58 times to Rs 1,90,886 crore; for states, it had shot up 125 times to Rs 3,86,001 crore.
What was the origin of the New Pension Scheme?
- The New Pension System proposed by the Project OASIS report became the basis for pension reforms — and what was originally conceived for unorganised sector workers, was adopted by the government for its own employees.
- The New Pension Scheme (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 dearness allowance 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.
- Individuals can choose from a range of schemes from low risk to high risk, and pension fund managers promoted by public sector banks and financial institutions, as well as private companies.
- Schemes under the NPS are offered by nine pension fund managers — sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Adita Birla, Tata, and Max.
-Source: Indian Express