Central Idea

• The New Pension Scheme (NPS) implemented by the NDA government in 2003-04 was a far-sighted reform that moved towards a sustainable contributory pension system. However, some state governments have reversed the pension reform and returned to the financially burdensome and fiscally non-viable Old Pension Scheme (OPS).

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 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 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.

Negative impacts of the reversal to OPS

• The reversal to OPS would have negative impacts, especially on the poor and vulnerable population, including women and children. Here are some potential impacts:
• Reallocation of resources: The reversal to OPS would lead to a reallocation of resources away from the state’s development expenditure, which benefits the poor, and towards a much smaller group of people who have benefited from a secured and privileged job throughout their working life. It could worsen inequality and lower economic growth in the states.
• Reduction in productivity: Going back to OPS would reduce the productivity of the poor, further diminishing their future economic prospects. Economic services such as infrastructure and rural and urban development would be affected more severely than social services.
• Fiscal burden: The old pension scheme (OPS) was financially burdensome and fiscally non-viable. As public employees’ life expectancy increased, the state’s fiscal burden under the OPS began to rise exponentially, necessitating pension reforms. Reversing to OPS would put the fiscal burden back on the government, which could have negative impacts on the state’s finances.
• Tradeoff between pensions and development expenditure: Pension reforms were a watershed moment for the states, and reversing to OPS would result in a tradeoff between pension and development expenditure of the states. The pension reforms aimed to finance the increased non-development expenditure related to pensions through taxes or borrowing. However, our analysis revealed that from 1990 to 2004, the states’ revenues did not match the state’s increased expenditure, resulting in a higher fiscal deficit.

Facts for prelims: NPS vs OPS

Conclusion

• The state governments should not ignore the impact of the OPS on the poor and vulnerable, particularly women and children. The reversal will deprive them of essential services such as health and education and prevent them from participating in growth opportunities. Therefore, state governments should not reverse the far-sighted pension reform and should continue to focus on development expenditure that benefits the poor.

Mains Question

Q. What is the New Pension Scheme (NPS) and how does it differ from Old Pension Scheme (OPS) Now states are reversing to OPS as a populist measure, discuss its the negative impacts.

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