Contributory Guaranteed Pension Scheme (CGPS): A Valuable Option

As several state governments announce their return to the old pension scheme (OPS), the pension debate is heating up. However, economists have criticised this move for two major reasons. To begin with, because the state must carry the entire burden of pensions, it may become fiscally unsustainable in the long run. Second, an unsustainable increase in pension allocation in the budget may come at the expense of other social expenditures directed towards the poor and marginalised groups.

What exactly is a pension?

  • A pension is a retirement plan that provides individuals with a stream of income after they retire from their job or profession. It is designed to provide a stable income throughout retirement and can be supported by companies, government organisations, or unions.

What exactly is the Old Pension Scheme (OPS)?

  • The OPS, also known as the Defined Benefit Pension System, is an Indian government pension scheme for its employees.
  • Retired government employees receive a fixed monthly pension under the OPS depending on their last received salary and years of service.
  • The government pays for this pension with current resources, resulting in higher pension liabilities.

What exactly is the National Pension Scheme (NPS)?

  • The Union government, led by Prime Minister Atal Bihari Vajpayee, decided in 2003 to phase out the existing pension programme in favour of the NPS.
  • The scheme applies to all new recruits joining Central Government service (excluding the armed forces) beginning on April 1, 2004.
  • The Central Civil Services (Pension) Rules, 1972 were revised with the advent of NPS.

What are two arguments against going back to the old pension system?

  • Fiscal Unsustainability: Because the state must shoulder the entire cost of pensions, it will become fiscally unsustainable in the medium to long term.
  • Trade-Off with Welfare Expenditure: Such an unsustainable increase in pension allocation in the Budget can only come at the expense of other more important welfare expenditures earmarked for the poor and marginalised groups.

The similarities between the two arguments

  • Both arguments assume that fiscal revenues are fixed, which is not always the case if the government sets the right priorities.
  • Both arguments assume that an unsustainable increase in pension allocation in the Budget can only come at the expense of other more pressing welfare expenditures targeted at the poor and marginalised.

Why Public sector workers are asking for a guaranteed pension in place of the NPS?

  • Fluctuating pension returns: Because the NPS is market-based, pension returns fluctuate in accordance with market returns. This generates uncertainty and makes it difficult for employees to plan for life after retirement.
  • Guaranteed pension: Employees in the public sector want a pension that will pay them a set sum after they retire. This will provide them with a steady and predictable post-retirement existence.
  • Employee contribution: A major portion of the new contributory guaranteed pension system (CGPS) will be paid by the employees themselves. This is in contrast to the previous pension programme (OPS), which required no employee contribution.
  • Protection from market volatility: The CGPS protects employees from market fluctuations. If the market return exceeds the guaranteed pension, the difference is pocketed by the state. Overall, the additional burden on the CGPS may be minor in comparison to the NPS.
  • Burden-sharing: The CGPS ensures that the burden of uncertainty is shared by all employees. In the OPS, elite workers benefit at the expense of their lower-income colleagues. However, as with the NPS, the burden in the CGPS is only the employer’s contribution portion.

Potential drawbacks of a CGPS

  • Employee contribution burden increases: Employees will continue to contribute a fixed proportion of their basic wage to their pension under the CGPS. This may place a greater strain on them than the existing system, in which their contribution varies according to market results.
  • Additional administrative burden: Implementing a new pension plan, such as CGPS, may impose additional administrative burdens and expenditures on the government, which may be difficult to manage efficiently.
  • Market return uncertainty: While the CGPS provides a fixed pension amount, it does not guarantee market returns. If market returns are lower than predicted, the government will be forced to pay the difference between the guaranteed and real pension.

Way ahead

  • For public sector employees, the government may explore establishing the Contributory Guaranteed Pension Scheme (CGPS) as an alternative to the New Pension Scheme (NPS).
  • The CGPS would allow the state to keep any extra market profits rather than bearing the entire burden of uncertain market returns as the NPS does.
  • To boost revenue and lessen reliance on fixed fiscal receipts, the government should explore rationalising taxes, such as imposing inheritance and wealth taxes.
  • The government should form a special task team to rationalise pensions and address the question of long-term pension sustainability.
  • A potential disadvantage of the CGPS is that it may necessitate a higher contribution from employees, which may reduce their take-home income during their working life. This might be remedied, though, by providing tax discounts or other incentives to encourage employees to pay to the scheme.

@the end

The present pension debate in India has highlighted the necessity for a well-designed and sustainable pension programme that can meet the needs of public sector employees while remaining fiscally reasonable. The CGPS is a feasible alternative to the OPS and the NPS in that it provides public sector employees with a guaranteed pension after retirement while being mostly supported by the employees themselves. While there may be some difficulties in implementing the CGPS, with proper planning and execution, it could serve as a model for sustainable and equitable pension schemes that can support the growing needs of India’s ageing workforce.

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