Guaranteed pension is not bad economics

Context:

With multiple State governments announcing reversion to the old pension scheme (OPS) and some more speculating to do the same, the debate on pensions is hotting up.

Issues with Old Pension Scheme

• Fiscally unsustainable: Since the State has to bear full burden of pensions, it will become fiscally unsustainable in the medium to long run.
• Compromising other welfare schemes: Unsustainable rise in pension allocation in the Budget can only come at the cost of other more pressing welfare expenditures allocated to the poor and marginalised sections.
• Catering Elite section: The OPS is a case of elite workers gaining at the cost of their brethren lower on the income ladder.

Benefits of OPS

• Definite formula and pension: Employees were entitled to a pension that was calculated in advance and was equal to fifty percent of their most recent salary under the old plan.
• Guaranteed pension sum: OPS is a post-retirement benefit for government area representatives that guaranteed a sum to be paid to the worker after his superannuation.
• Fully government payable: The government paid for the Old Pension in its entirety. Every year, the budget for pensions was announced during the Budget announcement. The annual DA increase in the pension was also the responsibility of the federal and state governments.

Way forward

• Rationalizing Taxes: The government should rationalise taxes, say by implementing inheritance and wealth taxes, which are either negligible or non-existent in India.
• Contributory guaranteed pension Scheme: Employees’ contribution can be deducted towards pension during the working life, but can give them a guaranteed pension after they retire.