Why Everyone Loves the Old Pension Plan

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Rajasthan Chief Minister Ashok Gehlot has let out a genius. His government recently announced it was reinstating the old Pension Scheme (OPS) for its employees, scrapping the contributory scheme that came into effect after India launched bold pension reforms nearly two years ago. decades. Several state governments, especially those led by parties opposed to the BJP-led Union government, are preparing to follow Gehlot’s lead.

Ashok Gehlot recently announced that Rajasthan is restoring the old pension scheme. More than 60% of state revenue is spent on wages and pensions.

I recommend that an independent committee be formed to review the whole thing. And if there are gaps, let them make recommendations. —Yashwant Sinha, former finance minister

Economists have pointed out that such a populist move would be retrograde, as it can drain state finances. However, several states clung to the idea. In Congress-governed Chhattisgarh, where the party’s flagship income guarantee scheme, NYAY, is being implemented for farmers and the landless, OPS restoration is set to become a mainstay of the economic model. party’s evolving alternative. Congress has already promised to bring back PAHO if it comes to power in Himachal Pradesh, where elections are due later this year.

DMK-led Tamil Nadu and YSR Congress-led Andhra Pradesh have also pledged to return to PAHO. The Samajwadi party’s campaign promise to reinstate the OPS ahead of Uttar Pradesh assembly elections helped it win the majority of postal votes (51%) cast by government employees. For political parties, the electoral gains to be drawn from support for the OPS now seem obvious.

As the rising cost of living hits the middle class, OPS and the accompanying insured pension (equivalent to 50% of last salary) is an attractive proposition. Under the contributory scheme called the National Pension System (NPS), in force since 2004, employees contribute 10% of their monthly salary and the government intervenes with 14%. The money goes to pension funds run by private companies. Once retired, employees can withdraw 60 percent of their contribution, while 40 percent goes to annuity funds that provide a monthly pension.

Due to several shortcomings, however, the NPS has not worked well for employees, many of whom would begin to retire in the 2030s. Vijay Kumar Bandhu, a teacher from Uttar Pradesh, struggled to restore OPS. He is chairman of the National Movement for Old Pension Scheme, a national organization established seven years ago. “We want Social Security, which the NPS lacks,” he said. “There are many examples of people retiring and earning very little. What we get is a pittance. Our pension is left at the mercy of the markets. Only a few percent of the country’s population invest in the markets. If I retire at a time when there is a stock market crash, my retirement money would also decrease.

Bandhu made several arguments against the NPS – namely that the pension does not increase with subsequent salary commissions; there are few benefits for death in service; and employees must deal with private insurance companies, not the government, in the event of a dispute.

More than 78 lakh government employees (22.74 lakh in the Center and 55.44 lakh in the state governments) report to the NPS. Their total contribution till February 28 this year was Rs4 lakh crore. Returning to OPS would mean that employees would not contribute 10% of their salary to the pension fund, while the government’s share would be deferred and paid later as a full pension.

According to the Reserve Bank State Finance Report 2019, the total pension bill was over 04 lakh crore in the financial year 2021-22. Economists estimate the figure would rise by more than 6% if PAHO were reinstated.

India’s pension reforms began almost inadvertently in 1998, when Union Minister Maneka Gandhi set up a group to implement “Project Oasis” – an acronym for “Social Security and Income for the Elderly “. The panel was chaired by the chairman of Unit Trust of India, Surendra Dave, and its report was forwarded by Maneka Gandhi to Finance Minister Yashwant Sinha to take up the pension issue in full.

“I looked at India’s pension system in detail,” recalls Sinha. “Everyone came to the same conclusion that the Indian government would pay more in pensions than in wages and salaries. It would have blown the budget. With all the studies supporting this conclusion, we decided that instead of a fixed pension plan, we should opt for a contributory pension plan.

After consultations with Prime Minister Atal Bihari Vajpayee, Sinha gave shape to the scheme in his 2001 budget. Employees started joining the scheme from January 1, 2004. other financial instruments depending on the choice made by retirees,” Sinha said. “If he wanted security, the money would be invested in government securities; or if he wanted to take a little risk, in the stock market.

According to Sinha, the move to OPS is retrograde. “Over time, the OPS will make public finances unsustainable. State finances are not always in the pink. They are largely dependent on central funds. Therefore, if there is an additional burden, their financial situation would become unsustainable. These are long-term economic reforms against populism,” he said.

Bandhu, however, argued that there would be no additional burden on state governments. “For example, there are 10 lakh employees in Uttar Pradesh under NPS. An employee pays 10% of his salary and the government pays 14%. This 24%, which is government money, is given to private companies,” Bandhu said. “On average, an UP government employee pays Rs 7,000 to Rs 8,000 per month under the NPS. government used this money and invested it by itself, it could pay the pension bill.

But experts support Sinha’s view. “PAHO is financially unsustainable due to demographic transition,” said Renuka Sane, associate professor at the National Institute of Public Finance and Policy in Delhi. “There are more old people now. You pay through the tax revenue system because there is no contribution. Previously, people lived five to ten years after retirement. Now people live 25 years after retirement. Then their family or spouse will live for another five years. Thus, the government’s obligation becomes enormous.

Sane pointed out that Rajasthan spends more than 60% of its income on salaries and pensions. “So how is it fair that 6% of the workforce gets 60% of government revenue?” she asked. “That’s something fundamentally wrong with this system.”

Various policy shortcomings have created problems for the NPS. The system was designed for those who join at age 25 and then pay contributions to market-linked pension funds for 30 to 40 years. Serving employees aged 40 or over were then forced to join the NPS, meaning they didn’t have enough time to build a healthy pension fund. Another problem plaguing the NPS, highlighted earlier in a report by the Comptroller and Auditor General, is that state governments have failed to exercise discipline in making contributions to pension funds.

The Union government denied that it was planning to restore the OPS. The Pension Fund Development and Regulation Authority apparently plans to offer more attractive pension schemes with a guaranteed rate of interest for those uncomfortable with market volatility.

“Look how much pension a former deputy or deputy receives,” Bandhu said. “In Punjab, former Chief Minister Parkash Singh Badal, who had been elected MP several times, received Rs 5.75 lakh per month as a pension. People who receive pensions say we should not receive a pension. MPs receive Rs 25,000 as a pension for five-year terms, and an additional Rs 200 for each additional year served.

There have been many experiments with pensions in various countries since the idea of ​​giving pensions was first proposed by German Chancellor Otto von Bismarck in 1881. Governments toy with different ideas to make pensions fiscally achievable. In this regard, India’s experience with the NPS needs further refinement.

“It’s been 18 years [since the inception of NPS]; let’s look at how things worked out,” Sinha said. “I strongly recommend that an independent committee be formed to review the whole thing. That they report to the government on the operation of the new regime. And if there are any shortcomings, let them make recommendations on how it could be improved.

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