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Why the Old Pension Scheme is a bad economics?

  • Category
    Economy
  • Published
    17th Nov, 2022

Context

The decision of various state governments (Rajasthan, Chhattisgarh and Punjab) to revert to the Old Pension Scheme (OPS) rather than to apply New Pension system has attracted several criticisms and concerns over the economic instability in the States.

Background

  • The history of the Indian pension systemdates back to the colonial period of British-India. 
  • The Royal Commission on Civil Establishments, in 1881, first awarded pension benefits to the government employees.
  • The Governments of both Centre and States fund the Pension of retired officials and Employees working for them using its revenues.
  • The pension is regarded as Liability for the Government which it has to pay using its funds. However, 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.
  • This has made a compulsion to use a sustainable method of financing Pensions to employees for both Centre and the States.

About

How Pension system works in India?

  • All pension plans in India provide guaranteed maturity benefit. This is the reason why pension plans in India are also known as guaranteed pension plans.
  • The maturity benefits are generally the fund value or 101% of Premium paid, whichever is higher.

The Old vs. New Pension scheme:

Old pension Scheme (OPS)

New Pension Scheme

  • The OPS is an assured inflation-indexed monthly family pension till you (and your spouse) live(s).
  • The OPS level is linked to the last pay pensioner drew.
  • The NPS is a retirement savings scheme to secure the life of an individual financially after retirement.
  • Its value is determined by the market prices in which the corpus is invested.

Concerns associated with the Old pension scheme:

  • The pension liability remained unfunded:as there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
  • No fixed source of funding: 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.
  • Burden on Government Budget: 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 Government’s Income and Expenditure:

  • Income:
    • Direct taxes: Income tax, corporation tax, national insurance contributions, council tax etc.
    • Indirect Taxes: Indirect taxes are typically added to the prices of goods or services. Sales tax, value-added tax, excise tax, and customs duties are examples of indirect taxes.
  • Expenditure:
    • Capital expenditure:money spent to acquire, repair, update, or improve a fixed company asset, such as a building, business, or equipment.
    • Current expenditure: wages, salaries, raw material costs, and administrative expenses.

Negative Impacts of Old Pension scheme:

  • Rolling out major amount of money: Overall, pension payments by states roll-out a quarter of their own tax revenues. For some states, it is much higher.
    • For Himachal, it is almost 80 per cent (pensions as a percentage of the state’s own tax revenues); for Punjab it is almost 35 per cent; for Chhattisgarh 24 per cent; and for Rajasthan 30 per cent.
  • High Budget deficit for Governments: If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts.
  • Long-term Burden on Tax-payers: The current taxpayers’ paying for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels.
    • This means the pension of someone who retired in 1995 may well be the same as that for someone who retires in 2025.
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