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Warning on Fiscal Burden from Return to Old Pension Scheme 


The Reserve Bank of India (RBI) has issued a report titled “State Finances: A Study of Budgets of 2023-24,” expressing concern over the financial strain imposed by a return to the Old Pension Scheme (OPS) by some states. The report highlights that such a move would significantly burden state finances, limiting their capacity for capital expenditure and hindering efforts to drive economic growth.


GS III: Indian Economy

Dimensions of the Article:

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

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: The Hindu

February 2024