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Old is not gold: On the return to the old pension scheme

  • Published
    16th Dec, 2022
Context

A few political parties are promising to restore the Old Pension Scheme in some states. The old pension scheme works as an electoral strategy but is an imprudent fiscal policy.

What is the Old Pension Scheme (OPS)?

  • It is often described as a ‘Defined Benefit Scheme’.
  • The scheme assures life-long income, post-retirement.
  • Under OPS, employees get a pension under a pre-determined formula which is equivalent to 50% of the last drawn salary.
  • They also get the benefit of the revision of Dearness Relief (DR), twice a year.
  • The payout is fixed and there was no deduction from the salary.
  • There was the provision of the General Provident Fund (GPF).
  • The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.

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's budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
  • The 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 of 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

Negative Impacts of the Old Pension scheme:

  • Rolling out a 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.
  • The 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.

Impact of opting for OPS:

  • Short-term gains for the state: They need not put up the matching contribution of 10% towards employee pension funds.
  • The burden on future generations: With a greying population, the burden of payments will fall on future generations.
  • Limiting benefit: It will only benefit organized government sector employees.
  • Less spending on general welfare: An increase in the fiscal burden of OPS is going to take up a significant portion of the State’s budget, thereby curtailing its outlays on general welfare as a whole.
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