Central Idea

• The debate on pensions is heating up as several state governments announce their reversion to the old pension scheme (OPS). However, economists have frowned upon this move, citing two major reasons. Firstly, since the state has to bear the full burden of pensions, it may become fiscally unsustainable in the long run. Secondly, an unsustainable rise in pension allocation in the budget can come at the cost of other welfare expenditures allocated to the poor and marginalized sections.

What is mean by pension?

• A pension is a retirement plan that provides a stream of income to individuals after they retire from their job or profession. It can be funded by employers, government agencies, or unions and is designed to ensure a steady income during retirement.

What is Old Pension Scheme (OPS)?

• The OPS, also known as the Defined Benefit Pension System, is a pension plan provided by the government for its employees in India.
• Under the OPS, retired government employees receive a fixed monthly pension based on their last drawn salary and years of service.
• This pension is funded by the government and paid out of its current revenues, leading to increased pension liabilities.

What is the National Pension System (NPS)?

• The Union government under PM Vajpayee took a decision in 2003 to discontinue the old pension scheme and introduced the NPS.
• The scheme is applicable to all new recruits joining the Central Government service (except armed forces) from April 1, 2004.
• On the introduction of NPS, the Central Civil Services (Pension) Rules, 1972 was amended.

What are two arguments against reverting to the old pension scheme?

• Fiscal Unsustainability: Since the State has to bear the full burden of pensions, it will become fiscally unsustainable in the medium to long run.
• Trade-Off with Welfare Expenditure: Such an unsustainable rise in pension allocation in the Budget can only come at the cost of other more pressing welfare expenditures allocated to the poor and marginalized sections.

The commonality between the two arguments

• Both arguments assume that the fiscal revenues are fixed, which is not necessarily the case if the government has its priorities right.
• Both arguments assume that unsustainable rise in pension allocation in the Budget can only come at the cost of other more pressing welfare expenditures allocated to the poor and marginalized sections.

Why Public sector workers are asking for a guaranteed pension in place of the NPS?

• Fluctuating pension returns: The NPS is market-based, which means that the pension returns fluctuate according to the returns prevailing in the market. This creates uncertainty and makes it difficult for employees to plan for their post-retirement life.
• Guaranteed pension: Public sector workers are looking for a guaranteed pension that will provide them with a fixed amount after retirement. This will ensure a stable and predictable post-retirement life for them.
• Employee contribution: In the new contributory guaranteed pension scheme (CGPS), a large part of the pension will be funded by the employees themselves. This is in contrast to the old pension scheme (OPS) where no contribution was required from the employees.
• Protection against market fluctuations: The CGPS provides protection to employees against market fluctuations. If the market return happens to be higher than the guaranteed pension, the State gets to pocket the difference. On balance, the additional burden on the CGPS may be marginal compared to the NPS.
• Burden-sharing: The CGPS ensures that the burden of uncertainty does not fall on employees alone. In the OPS, elite workers gain at the cost of their brethren lower on the income ladder. However, in the CGPS, the burden is only the employer’s contribution part, exactly as in the NPS.

Potential disadvantages of a CGPS

• Higher contribution burden on employees: Under the CGPS, employees will continue to contribute a fixed percentage of their basic pay towards their pension. This may put a higher burden on them compared to the current system, where their contribution fluctuates based on market returns.
• Additional administrative burden: Implementing a new pension scheme like CGPS may involve additional administrative burden and costs for the government, which could be challenging to manage efficiently.
• Uncertainty of market returns: While the CGPS guarantees a fixed pension amount, it does not provide any certainty on the market returns. If the market returns are lower than expected, the government will have to bear the burden of paying the difference between the guaranteed pension and the actual pension.

Facts for prelims: CGPS vs NPS

Way ahead

• The government could consider implementing the Contributory Guaranteed Pension Scheme (CGPS) as an alternative to the New Pension Scheme (NPS) for public sector workers.
• The CGPS would allow the state to pocket any excess returns from the market, rather than bearing the entire burden of uncertain market returns as in the NPS.
• The government should consider rationalizing taxes, such as implementing inheritance and wealth taxes, to increase its revenue and reduce its dependence on fixed fiscal revenues.
• The government should set up a special task force to rationalize pensions and address the issue of pension sustainability in the long run.
• A possible downside to the CGPS is that it may require a higher contribution from employees, which could affect their take-home pay during their working life. However, this could be addressed by offering tax breaks or other incentives to encourage employees to contribute to the scheme.

Conclusion

• The current debate on pensions in India has brought forth the need for a well-designed and sustainable pension scheme that can cater to the needs of public sector workers while being fiscally responsible. The CGPS presents a viable alternative to the OPS and the NPS providing public sector workers with a guaranteed pension after they retire while also being largely funded by the employees themselves. While there may be some challenges in implementing the CGPS, with proper planning and execution, the CGPS could serve as a model for sustainable and equitable pension schemes that can support the growing needs of an ageing workforce in India.

Mains question

Q. The debate on pensions is heating up as several state governments announce their reversion to the old pension scheme. Do you think Contributory Guaranteed Pension Scheme (CGPS) presents a viable alternative to the OPS and the NPS?

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