Note4Students

From UPSC perspective, the following things are important :

Prelims level: Guaranteed Pension System

Mains level: Not Much

pension

Central Idea

Andhra Pradesh’s Guaranteed Pension System (GPS) blends elements from both old and new pension schemes, offering the advantages of a guaranteed pension while not overly straining the state’s finances.
This innovative system holds the potential to preserve India’s hard-won pension reforms.

What is the Andhra Pension System?

A Hybrid Approach: The Andhra Pradesh Guaranteed Pension System Bill, 2023, recently approved by the state assembly, introduces a unique blend of the Old Pension Scheme (OPS) and the New Pension Scheme (NPS) implemented in 2004.
Contributory Guarantee: This system ensures government employees a monthly pension equivalent to 50% of their last-drawn salary, including dearness allowance relief.
Reason for Introduction: Andhra Pradesh introduced GPS as a response to resistance against NPS, which was viewed by many as inferior to the earlier scheme. The return to OPS was considered fiscally unsustainable, with the potential to drive the state’s fiscal deficit to 8% by 2050.

Breakthrough created

Long-standing Pension Reforms: India struggled for over a decade to implement pension reforms that led to the introduction of NPS in 2004.
Growing Discontent: Over time, public sentiment favored those receiving pensions under the old scheme, leading to discontent.
Political Promises: Political parties capitalized on this discontent, pledging to return to the old scheme if elected.
Andhra’s Middle Path: Andhra Pradesh’s GPS offers a middle ground, preventing a regressive return to the old scheme while addressing concerns about NPS.

How does the Andhra System work?

Enhancing Attractiveness: The contributory system guarantees a pension equivalent to 50% of the last drawn salary.
Balancing Financial Burden: Any shortfall in NPS returns is covered by the government.
Current NPS Pensions: Presently, NPS pensions amount to around 40% of an employee’s last drawn salary. Therefore, the government only has to fund the remaining balance.

Contributory Nature: NPS is a contributory scheme, with both employees and employers contributing to a corpus invested for returns.
Uncertainty: In NPS, the pension amount is not guaranteed, as it depends on corpus returns influenced by market conditions.
Ignoring Inflation: NPS does not consider inflation or pay commission recommendations.
Market Dependency: Opposition to NPS is fueled by fears of further reductions in pension due to adverse market conditions.

Budgetary Constraints: Under OPS, pensions were financed through the budget.
Unsustainable Growth: Pension liabilities for all states saw a compound annual growth rate of 34% for a 12-year period ending in 2021-22.
Budgetary Impact: In 2020-21, pension outgo accounted for 29.7% of states’ revenues.
Development Challenges: A return to OPS would strain government funds, hindering development efforts and operational financing.
Competitiveness Concerns: Such a shift could negatively impact India’s ease of doing business and overall competitiveness.