Old Pension Scheme vs New Pension Scheme

In News

• Recently, some of the political parties are promising to switch to the Old Pension Scheme.

Comparison between the Old and New system 

• Old System
  • Pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay.
• New System
  • New pension system came into effect for those joining government services from January 1, 2004.
  • It laid in its promise of an assured or ‘defined’ benefit to the retiree. 
  • It was hence described as a ‘Defined Benefit Scheme’.
  • Example – if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000.
    • The monthly payouts of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.
  • What is DA?
    • It is calculated as a percentage of the basic salary.
    • It is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living.
    • DA hikes are announced twice a year, generally in January and July.

Major issues associated with the OPS

• No specific corpus: The main problem was that the pension liability remained unfunded, that is, there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
• The pay-as-you-go scheme created inter-generational equity issues meaning the present generation had to bear the continuously rising burden of pensioners.
• OPS was also 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 centre and states: Over the last three decades, pension liabilities for the Centre and states have jumped manifold. 
  • In 1990-91, the Centre’s pension bill was Rs 3,272 crore, and the outgo for all states put together was Rs 3,131 crore. 
  • By 2020-21, the Centre’s bill had jumped 58 times to Rs 1, 90,886 crore; for states, it had shot up 125 times to Rs 3, 86,001 crore.
• Bad economics and bad politics
  • 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. 
  • Overall, pension payments by states eat away a quarter of their own tax revenues.
  • If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts.
• Inter-generational equity
  • There is also the larger issue of inter-generational equity. Today’s taxpayers are paying for the ever-increasing pensions of retirees.

New Pension Scheme

• It was the NDA government under A B Vajpayee that took up the gauntlet on pension reform. 
• The New Pension System proposed by the Project OASIS report became the basis for pension reforms and what was originally conceived for unorganised sector workers, was adopted by the government for its own employees.
• The NPS was for prospective employees; it was made mandatory for all new recruits joining government service from January 1, 2004.
• Contributions: 
  • The defined contribution comprised 10 percent of the basic salary and dearness allowance by the employee and a matching contribution by the government this was Tier 1, with contributions being mandatory.
  • In 2019, the government increased its contribution to 14 percent of the basic salary and dearness allowance.
• Schemes under the NPS are offered by nine pension fund managers
  • It is sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Adita Birla, Tata, and Max.

Further Reading: Unified Pension Scheme

Way forward

• This does bring state governments some short-term gains: they save money since they will not have to put the 10 percent matching contribution towards employee pension funds.
• For employees it will result in higher take-home salaries: since they too will not set aside 10 percent of their basic pay and dearness allowance towards pension funds.
• Bad politics: Contrast this with the bulk of the workforce which has no old age income security, but which also does not have much electoral salience.

Source: IE