18 November 2022 – The Indian Express

Old Pension Scheme

 Present circumstances:

• Some states, including Rajasthan and Chhattisgarh, recently reintroduced the Old Pension Scheme, and the Punjab government has announced that it will follow suit.
• Reversing change, according to some economists, is bad for both politics and the economy.

What was the Old Pension Scheme?

• The federal and state employees’ pensions were fixed at 50% of their most recent basic wage.
• Because it promised a retiree a definite or “defined” payment before a new pension system took effect for anyone joining the government after January 1, 2004, the Old Pension Scheme, or “OPS,” was alluring. It was referred to as a “Defined Benefit Scheme” as a result.
• For instance, a government worker would be entitled to a pension of Rs 5,000 if she retired with a basic monthly salary of Rs 10,000. The government announced increases in dearness allowance, or DA, for long-serving employees as well as an increase in pensioners’ monthly compensation.
• As a form of adjustment to offset the continually rising cost of living, the government offers DA, which is computed as a percentage of base income, to its employees and pensioners. DA increases are generally announced twice a year, typically in January and July. With a 4% DA boost, a retiree who currently receives a monthly pension of Rs 5,000 will see her income rise to Rs 5,200 per month.
• Currently, the government offers a minimum pension of Rs. 9,000 and a maximum pension of Rs. 62,500 each month. (50 percent of the Central Government’s highest monthly salary of Rs. 1,25,000).

What problems did the OPS bring up?

• The largest problem was that there was still no corpus set up specifically for pensions that would increase over time and be able to be used to make payments.
• The Indian government included pensions in its budget each year, but it didn’t have a clear plan for how they would be paid out in the future.
• As of the time of this writing, all pensioners had been paid for by current taxpayers because the government planned payments to retirees ahead of the Budget each year. As a result of the “pay-as-you-go” system, questions about intergenerational equity were raised, and the present generation was made to bear the steadily rising expense of pensions.
• The OPS was unmaintainable. Pensioners profited from indexation, or what is known as “dearness relief,” because their benefits increased annually, much like the salaries of current employees, causing mounting pension liabilities (the same as dearness allowance for existing employees). Additionally, lengthier payouts would result from an increase in longevity as a result of better medical facilities.
• Over the past three decades, the federal government’s and the states’ pension liabilities have risen. Pension expenses totaled Rs. 3,272 crore for the Centre in 1990–1991 and Rs. 3,131 crore for all the states combined. By 2020–21, the Center’s bill would have multiplied 58 times to reach Rs 1,90,886 crore, while the States’ bill would have multiplied 125 times to reach Rs 3,86,001 crore.

What was the strategy to handle this situation?

• The Union Ministry of Social Justice and Empowerment requested a report on the Old Age Social and Income Security (OASIS) initiative in 1998.
• An expert panel headed by S A Dave, a former SEBI and Unit Trust of India chairman, presented the findings in January 2000.
• The OASIS initiative did not aim to alter the government pension system; instead, it was primarily focused on the unorganised sector workers who lacked old age income security.
• According to figures from the 1991 Census, only 3.4 crore people, or less than 11% of the estimated total working population of 31.4 crore, had any type of post-retirement income security. This could have been a government pension, Employee Pension Scheme, or Employee Provident Fund (EPF) (EPS). There was no way for the remaining workers to plan for their financial security after retirement.
• Investors should think about safe (which allows up to 10% equity participation), balanced (which allows up to 30% equity investment), and growth (which allows up to 50% equity investment), three different types of funds that will be provided by six fund managers, according to the OASIS research. The balance would be invested in corporate or governmental bonds. Everyone would have their own retirement account and be required to make at least Rs. 500 in yearly contributions.
• A year and a half after the Project OASIS report was released, the Ministry of Personnel, Public Grievances and Pensions formed a high-level expert group (HLEG) under the direction of B K Bhattacharya, a former chief secretary of Karnataka, to look into the situation affecting government workers.
• The HLEG advocated a hybrid defined benefit/defined contribution plan for government employees. It recommended a 10% first-tier contribution from the employer and the employee together. Using the accumulating savings, pension payments would be issued as annuities.
• The employee contribution was not limited in the second tier, but the employer’s match was restricted to a maximum of 5%. A lump sum withdrawal or an annuity can be made with accumulated funds. Taxes wouldn’t apply to these earnings.

What was the origin of the New Pension Scheme?

• The foundation for pension modifications was the Project OASIS report’s New Pension System, which was initially designed for employees in the unorganised sector. The New Pension System was then implemented by the government for use by its own employees.
• The Central Government Employees’ New Pension Scheme (NPS) was introduced on December 22, 2003. The NPS was designed for future employees, in contrast to several other countries; starting on January 1, 2004, it became a requirement for all new government employment.
• Payments were required because this was Tier 1. 10% of the employee’s base salary, a dearness allowance, and a matching government contribution made up the defined contribution. In January 2019, the government’s portion of the basic salary and dearness allowance increased to 14%.
• Low-risk, high-risk, and pension fund managers are among the options available to people, and they are promoted by both public sector banks and financial institutions and private firms.
• On February 22, 2002, the report was submitted, but the government disapproved of it.

Why is the OPS so bad?

• Over the past 30 years, the overall cost of state pension obligations has skyrocketed, rising from Rs 3,131 crore in 1990–1991 to Rs 3,86,001 crore in 2020–21.
• Pension payments cost states a total of one-fourth of their tax revenue. It is noticeably greater in some states (see graph). Nearly 80% of the state’s own tax revenues in Himachal, close to 35% in Punjab, 24% in Chhattisgarh, and 30% in Rajasthan go for pensions.
• After paying for this expense, which includes the wages and salaries of state government employees, states are left with almost nothing from their own tax income. The funding of a few former government employees with a share of taxpayer money cannot be seen as wise politics.
• There is also the bigger problem of intergenerational equity. Due to current taxpayers financing retirees’ steadily rising pensions and Pay Commission awards that have almost brought previous retiree pensions up to current levels, the pension of someone who retired in 1995 may very well be the same as that of someone who retires in 2025.
• As things stand, the present generation of taxpayers not only contributes to the 10% payment that the state governments have been paying for those who started working after 2004, but they also pay for the pensions of people who started working for the government before 2004.
• As a result, state governments will save money in the short term by not having to provide the 10% matching contribution to employee pension funds. As a result, since employees are no longer required to contribute 10% of their basic salary and dearness allowance to pension funds, their take-home pay will grow.