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 Old Pension Scheme

Context:

Congress has already reverted to the Old Pension Scheme in Rajasthan and Chhattisgarh, and AAP has said it would do the same in Punjab.

Relevance:

GS II: Polity and Governance

Dimensions of the Article:

  1. About Old Pension Scheme
  2. Concerns with the OPS
  3. 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.

Dearness allowance
  • 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


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December 2022
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