The announcements made by some political parties to transition to the Old Pension Scheme (OPS) in the run-up to elections are seen by experts as terrible economics and bad politics.
Several complaints and worries about the economic instability in the States have been raised as a result of the choice of certain state governments (Rajasthan, Chhattisgarh, and Punjab) to switch back to the Old Pension Scheme (OPS) rather than implement the New Pension scheme.
Background
- The origins of the Indian pension system may be traced to British India’s colonial era.
- The first-time government employees received pension benefits was in 1881, by the Royal Commission on Civil Establishments.
- The pension is viewed as a liability for the government, which it must meet using its funds, and is funded by the governments of the centres and the states, as well as by the salaries of their employees. However, over the past three decades, the Center’s and the States’ pension liabilities have increased.
- The Centre’s pension expenditure for 1990–1991 was Rs. 3, 272 crores, and the total expenditure for all states was Rs. 3, 131 crores.
- The State’s bill increased 125 times to Rs. 3, 86,001 crores by 2020–21, while the Center’s bill increased 58 times to Rs. 1, 90,886 crores.
- As a result, both the Center and the States are now required to use a sustainable means of financing pensions for employees.
Pension system in India
- Benefits for maturity are guaranteed for all pension plans in India. This explains why pension plans are frequently referred to as guaranteed pension plans in India.
- Typically, the fund value or 101% of the premium paid, whichever is higher, constitutes the maturity benefits.
Old pension Scheme (OPS)
- The OPS is a guaranteed monthly family pension that is inflation-indexed as long as you (and your spouse) survive (s).
- The last pay pensioner drew is what determines the OPS level.
New Pension Scheme
- The NPS is a retirement savings programme designed to ensure a person’s financial well-being after retirement.
- Its value is based on market prices where the corpus is invested.
The Concerns associated with the Old Pension Scheme
- There was no dedicated pension fund that would continuously grow and be available for payments, so the pension liability remained unpaid.
- No reliable source of funding: While pensions were included in the annual budget of the Indian government, it was unclear how they would be paid in the future.
- The financial strain on the government: As at this point, all pensioners had been paid for by current taxpayers, who annually anticipated payments to retirees ahead of the budget.
- The “pay-as-you-go” system produced concerns with intergenerational equity, forcing the current generation to shoulder the ever increasing burden of pensioners.
Negative Impacts of the Old Pension Scheme
- Major financial distribution: State pension payments account for around a quarter of all state tax receipts. It is significantly higher in some states.
- For Himachal, it is almost 80%; for Punjab, it is almost 35%; for Chhattisgarh, it is 24%; and for Rajasthan, it is 30% (pension as a proportion of state tax receipts).
- Governmental budget deficits that are high States are left with very little from their tax revenues once this bill includes the wages and salaries of state government personnel.
- Long-term Burden on Taxpayers: Current taxpayers are paying for retirees’ ever-rising pensions, and Pay Commission awards have nearly brought old retirees’ pensions up to current levels.
- As a result, the pension for someone who retired in 1995 and someone who retires in 2025 may be equal.