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Making a case for the Old Pension Scheme to be more inclusive

  • Published
    17th Oct, 2022
Context

Recently, after Rajasthan and Chhattisgarh, Punjab has become the latest State that has announced its plan to revert to the Old Pension Scheme (OPS) rather than to apply the New Pension system which has attracted several criticisms around the country.

Background
    • The history of the Indian pension system dates back to the colonial period of British India. 
    • The Royal Commission on Civil Establishments, in 1881, first awarded pension benefits to government employees.
    • The Government of India Acts of 1919 and 1935 made further provisions.
    Increasing population: The number of senior citizens increased – from 10.38 Crore in 2011 to an estimated 17.3 Crore in 2026 and 30 Crore in 2050.

    How does the Pension system work in India?

    • All pension plans in India provide guaranteed maturity benefits. 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 the Premium paid, whichever is higher.
    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 saving scheme to secure the life of an individual financially after retirement.

    What are the issues associated with NPS?

    • The NPS is a corpus from which you can draw a pension after retirement. Its value is determined by the market prices in which the corpus is invested.
    • One of the issues with the NPS is the amount of monthly pension you would draw (for the same contribution during service) with three hypothetical market rates of return is significantly lower for NPS.
    • Secondly, it is dependent on the vagaries of the market prices of equity/bonds in which the corpus is invested. To be sure, the markets do not crash often and in the long run, they go up rather than down.
    • If there is a crash, the downside has to be absorbed by the retirees.
    According to a 2008 OECD study, the global financial crisis had wiped a total of $5 trillion off the value of private pension funds in rich countries compared to the start of the year 2022.

Why is the Old pension scheme getting support from a few State governments?

  • The OPS is fixed government expenditure irrespective of an economic slowdown or a stock market crash, which makes it a good counter-cyclical policy measure during a crisis. In fact, the Sixth Pay Commission in India did precisely this during the Great Recession of 2008.

Reasons to shift from the Old to the New Pension scheme:

  • Load on government’s Expenditure
  • Scams and Corruption in funds allocated for Pensioners
  • Non-inclusion of Employees from the Unorganised sector
  • Out-dated structure and less consideration of fluctuations of Market prices.

Required interventions

  • Economic and social innovation
  • Promotion of the silver economy
  • Innovative models of finance
  • Social entrepreneurship
  • Effective public policy
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