Potential Consequences of OPS Reversal

The NDA government’s implementation of the New Pension Scheme (NPS) in 2003-04 was a foresight reform that moved the country towards a sustainable contributory pension scheme. However, some state governments have reverted to the monetarily burdensome and fiscally unsustainable Old Pension Scheme. (OPS).

What is pension?

  • A pension is a retirement plan that gives individuals with a stream of income after they retire from their work or profession. It is intended to provide a steady income during retirement and can be funded by employers, government agencies, or unions.

What is OPS?

  • The OPS, also known as the Defined Benefit Pension System, is an Indian government pension plan for its workers.
  • Retired government workers receive a fixed monthly pension under the OPS based on their last drawn pay and years of service.
  • The government pays for this pension with current revenues, resulting in higher pension liabilities.

What is NPS?

  • The New Pension Scheme (NPS) is a market-linked, defined contribution pension scheme that was implemented in India in 2004 to replace the Old Pension Scheme. (OPS).
  • The National Pension System (NPS) is intended to provide retirement income to all Indian citizens, including government personnel, private sector workers, and self-employed individuals.

The negative consequences of the OPS turnaround

  • The reversal of OPS would have detrimental consequences, particularly for the poor and vulnerable populations, such as women and children. Here are some examples of possible consequences:
  • Resource reallocation: The abandonment of OPS would result in a reallocation of resources away from the state’s development spending, which helps the poor, and towards a much smaller group of people who have benefited from a secure and privileged job throughout their working lives. It has the potential to exacerbate inequality and slow state economic development.
  • Productivity reduction: Returning to OPS would reduce the productivity of the poor, further reducing their future economic chances. Economic services, such as infrastructure and rural and urban growth, would be hit harder than social services.
  • The previous pension plan (OPS) was financially burdensome and fiscally unsustainable. The state’s fiscal burden under the OPS started to rise exponentially as public employees’ life expectancy grew, necessitating pension reforms. Reverting to OPS would shift the budgetary burden back to the government, potentially harming the state’s finances.
  • Pension and development expenditure tradeoff: Pension reforms were a watershed point for states, and reverting to OPS would result in a tradeoff between pension and state development expenditure. Pension reforms sought to fund higher non-development expenditure on pensions through taxes or borrowing. However, our analysis showed that from 1990 to 2004, state revenues did not meet state expenditure increases, resulting in a larger fiscal deficit.

@the end

The impact of the OPS on the poor and vulnerable, especially women and children, should not be overlooked by state governments. The reversal will deprive them of essential services such as health and education, as well as chances for growth. As a result, state governments should maintain the long-term pension reform and continue to prioritise development spending that helps the poor.

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