Note4Students
From UPSC perspective, the following things are important :
Prelims level: NPS
Mains level: Pension reforms and challenges
Central Idea
- The demand for the old pension scheme (OPS) is growing in India, particularly after some states announced plans to revert to it. The mainstream critique of OPS is centered around inefficiency and fiscal deficit concerns. However, it is crucial to examine the policy from the class and welfare perspectives.
What is 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.
Did you know: The National Pension System (NPS)?
- NPS is a market-linked, defined contribution pension system introduced in India in 2004 as a replacement for the Old Pension Scheme (OPS).
- NPS is designed to provide retirement income to all Indian citizens, including government employees, private sector workers, and self-employed individuals.
Analyzing the Impact of OPS on India’s Socio-Economic Landscape
- Inequality and Regressive Redistribution: Under the National Pension System (NPS), the Sixth Pay Commission increased the basic salary of government employees to cover pension contributions and promote post-retirement savings. As a result, the salary of a government employee is higher than the income of more than 90% of the population. The OPS thus acts as a regressive redistribution mechanism favoring a better-off class.
- Rising Pension Liabilities: Pension liabilities of the government increased substantially due to the Sixth pay matrix, reaching 9% of total state expenditure. By 2050, pension expenditure will account for 19.4% of total state expenditures, assuming the current growth rate remains constant.
- Disproportionate Burden on the Lower Class: The bottom 50% of the population faces the inequitable burden of indirect taxation, six times more than their income. Due to OPS, they must bear the burden of supporting government employees’ pensions, which could push them further into poverty.
- Expenditure Challenges and Public Goods: As India’s population ages and public provision of education and healthcare becomes more critical, OPS poses expenditure challenges for providing public goods. This situation compels governments to compress already low social sector expenditures, pushing marginalized groups into further destitution.
- Monopolization of Future Labor Markets: The OPS facilitates the monopolization of future labor markets in the private sector by a proprietary class, allowing supervisory bureaucracy to consolidate its position and emerge as a dominant group.
Recommendations for Equitable Resource Distribution
- Opposition to the OPS should focus on equitable distribution of resources and expansion of universal provisions of public goods.
- Implement a participatory pension system for government employees to provide more egalitarian outcomes.
- Tweak the NPS to provide a guaranteed monthly return for lower-rung employees.
- Address unequal pay among various ranks of employees through administrative reforms.
- Advocate for progressive taxation of the top 10% and a rationalization of political executives’ pensions and profligacy.
Facts for prelims: NPS vs OPS
| Parameter | National Pension System (NPS) | Old Pension Scheme (OPS) |
| Type of System | Defined Contribution System | Defined Benefit System |
| Funding | Contributions from employee and employer | Government-funded |
| Investment | Market-linked investments in various asset classes | No direct investment involved |
| Returns | Subject to market risks | Predetermined and not market-linked |
| Pension Amount | Depends on accumulated corpus and investment returns | Based on last drawn salary and years of service |
| Annuity & Lump-sum Withdrawal | Minimum 40% corpus used to purchase annuity, remaining can be withdrawn as lump-sum | Fixed monthly pension, no annuity or lump-sum withdrawal |
| Portability | Portable across jobs and sectors | Limited to government employees |
| Flexibility | Choice of investment options, fund managers, and asset allocation | No flexibility, pension determined by predefined formula |
Conclusion
- It is essential to recognize the disenchantment with neoliberalism driving the demand for the OPS. Government employees and policymakers must work together to address the challenges posed by OPS and implement pension reforms that prioritize equitable resource distribution, efficient allocation, and social welfare.
Mains Question
Q. Compare and contrast OPS with the National Pension System (NPS) and discuss the impact of Old Pension Scheme (OPS) on India’s socio-economic landscape.
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