Old Pension Scheme (OPS) in India and Associated Concerns

About Old Pension Scheme (OPS)

Assured income after retirement

In the Old Pension Scheme (OPS), upon retirement, employees receive 50 per cent of their last drawn basic pay plus dearness allowance or their average earnings in the last ten months of service, whichever is more advantageous to them.

• A ten-year service requirement should be met by the employee.
• Employees are not required to contribute to their pensions.
• An incentive for taking on government employment was the guarantee of a pension post-retirement and a family pension.
• Retirement corpus building was not pressured.

Unsustainable OPS

The OPS was removed by the government in December 2003.

• All states have migrated to the NPS, except for West Bengal and Tamil Nadu since adoption had to be done on a voluntary basis.
• In its place, the National Pension System (NPS) took effect from April 1, 2004.

Reason for Discontinuity

It was discontinued given the problem of pension debt sustainability, an ageing population, the explicit burden on future generations and the incentive for early retirement (as the pension is fixed at the last drawn salary).

Reintroduction of Old Pension Scheme by States

The Rajasthan government has said it will bring back the old pension scheme in the state from the next financial year, and Chhattisgarh is expected to follow suit.

Old Pension Scheme and National Pension System (NPS)

• National Pension System (NPS) is a contribution-based pension system.
• Every government employee is allotted a Permanent Retirement Account Number and has to mandatorily contribute 10% of pay and dearness allowance to the pension fund, which is matched by the government.
  • In 2019, the government’s share of the contribution has been raised to 14% from 10%.
• NPS is a two-tier contribution-based investment vehicle in which an individual has full authority to decide where to invest his or her money.
• Modes of investment:
  • Active choice: Choosing your own combination of investing options, with a maximum of 75 per cent in equities up to age 50.
  • Auto choice: Allocation is made as per the investor’s age automatically by NPS.
• Management of Fund: The savings are pooled into one pension fund which is invested by professional fund managers regulated by the Pension Fund Regulatory & Development Authority (PFRDA).
• Eligible: Resident as well as non-resident Indians in the age group of 18-60 years (as of the date of submission of NPS application) can invest.
• Tax benefits: A tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961.
  • An additional deduction of Rs 50,000 is available for investments under 80CCD (1b).
• Maturity: Once NPS matures at the age of 60 years, you can withdraw 60 per cent of the proceeds as a lump sum.
• The remaining 40 per cent needs to be mandatorily invested in annuities listed by PFRDA.

Old Pension Scheme Concern with NPS

• Unpredictable:  NPS pension amount is not fixed, and there is no General Provident Fund (GPF) benefit.
• Market Uncertainty: Some employees are worried that the new NPS won’t provide them with the same benefits as the previous programme. The market volatility makes it unlikely that their money would be safe with fund managers, and they fear that their pension may be extremely meagre.
• Restrictions on withdrawals: Before the subscriber turns 60 years old, NPS prohibits all types of withdrawals.
• There are no tax advantages because the NPS corpus, which subscribers can utilise to purchase annuities or to draw pensions, is taxable when the plans mature.
• Investment cap: The subscriber is not permitted to allocate more than 50% of their total NPS account investments to stocks.

Advantage of Old Pension Scheme for Employees

• Employees under the OPS receive benefits from the twice-yearly modification of the Dearness Relief (DR).
• The General Provident Fund was a provision of the OPS (GPF).
• Reducing Financial Burden: In the OPS regime, the government was responsible for taking care of all the costs, and employees had more money to spend.

Concerns Associated with Old Pension Scheme in India

Bad Economics

• Pension Liability Remained Unfunded: There is no corpus specifically for pension, which would grow continuously and fund for pension.
• Inter-Generational Equity Issues: Current generation of taxpayers are paying for pension bill of those who joined government service before 2004 but are contributing to the 10 per cent contribution the state governments have been making for those who joined from January 1, 2004.
• Unsustainable: 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).
  • Better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
• Burden on Exchequer: Over the last three decades, pension liabilities for the Centre and states have jumped manifold.
  • In 30 years, the cumulative pension bill of states has jumped to Rs 3,86,001 crore in 2020-21 from Rs 3,131 crore in 1990-91.

Bad Politics

• Funding a small number of former government employees by utilizing a chunk of taxpayers’ money cannot be good politics.
• Pension payments by states cost away quarter of their own tax revenues, thus only small percentage is left for capital expenditure, which is essential for development and overall growth of state.
• Pension cater to small population: Majority of voters still remain out of government pension ambit, as a proportion of the total workforce of 900 million, India still have only 2.2 per cent of people employed in the public sector.

Old Pension Scheme Reason for Opting

• Short-term gains by Government: They save money since they will not have to put the 10 per cent matching contribution towards employee pension funds.
• Advantage for employees: It will result in higher take-home salaries, since they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.

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