Rising Demand for the Revival of Old Pension Scheme : Daily Current Affairs

19/11/2022

Relevance: GS-2: Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Key Phrases: old pension scheme, bipartisan consensus, Central Civil Services (Pension) Rules, 1972, Pension Fund Managers, government subscribers, defined benefit, Defined Contribution.

Why in News?

Political parties are advocating a return to the old pension scheme.
Beginning with Congress in Rajasthan and Chhattisgarh, similar promises have been made by the Aam Aadmi Party in Punjab and now by both these parties in the ongoing election campaign in Gujarat.

Key Highlights:

Such proposals, driven by short-term political considerations, benefit only a tiny sliver of the electorate.
Championed without an understanding of their long-term implications, or driven by a will to ignore the enduring consequences, they threaten to undo the hard-won policy gains that have been achieved through bipartisan consensus.
This will have disastrous implications for government finances.

Old pension scheme or the Defined Pension Benefit Schemes

The scheme assures life-long income, post-retirement.
Usually the assured amount is equivalent to 50% of the last drawn salary.
The Government bears the expenditure incurred on the pension.
The scheme was discontinued in 2004.

National Pension System (NPS)

The Union government under Prime Minister Atal Bihari 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 introduction of NPS, the Central Civil Services (Pension) Rules, 1972 were amended.
It is a participatory scheme, where employees contribute to their pension corpus from their salaries, with matching contribution from the government.
The funds are then invested in earmarked investment schemes through Pension Fund Managers.
At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.
It can have two components - Tier I and II. Tier-II is a voluntary savings account that offers greater flexibility in terms of withdrawal, and one can withdraw at any point of time, unlike Tier I account.
Even private individuals can opt for the scheme.
Since its launch, the NPS has built a robust subscriber base. At the end of October 2022, the scheme had 23.3 lakh central government subscribers and 58.9 lakh state government subscribers.
Then there are others, including 15.92 lakh subscribers from the corporate sector, and 25.45 lakh from the unorganised sector.

Why the Old Pension Scheme is both bad economics and bad politics?

Defined Benefit: The old pension scheme was based on the concept of “defined benefit”.
Under it, the pension of government employees was fixed on the basis of the last drawn salary.
Fiscally Challenging: However, funding this exorbitant entitlement over time would have been fiscally challenging — calculations of the implicit pension debt, based on the promises to government employees and others, painted a grim picture.
- Thus concerns over sustainability and scalability impelled the shift to the new pension scheme.
Defined Contribution: The new pension scheme was based on the concept of “defined contribution”, fixing the contribution of both the government and the employee.
Political Agenda: In the current environment, as parties in the Opposition space struggle to expand their reach, they may consider these moves as convenient.
Fiscal Implications: The fiscal implications of reviving old pension will be grave. According to the RBI, states had allocated Rs 3.86 lakh crore in 2020-21 towards pension.
- This works out to around 26 per cent of their own tax revenue.
- For states like Bihar, Himachal Pradesh, Odisha, Uttarakhand, the share in the government’s own tax revenues is even higher.

What is the latest directive from the government on the pension system?

The Department of Personnel and Training (DoPT) informed Parliament recently that there is no proposal to reintroduce the old pension scheme for Central government civil employees under consideration of the Government of India.
The Government had maintained that restoration of the old system would cause an unnecessary financial burden on the government.
The Finance Ministry had earlier ruled out proposals by a federation of Central and State governments employees saying that the “changes will be financially untenable.”
Union Minister said that the returns being market-linked is a basic design feature of the NPS. However, pension being a long-term product also enables the investments to grow with decent returns, despite short term volatility.

Conclusion:

While there will be short-term gains for states, as pension liabilities increase over time, the space for more productive forms of expenditure will be curtailed.
The burden of funding these pensions will fall on future generations.
Rather than focusing on the immediate return and relief, political parties need to take a longer term view, and resist the temptation for such fiscally imprudent moves.

Source: Indian Express

Mains Question:

Q. What is National Pension System? Why the Old Pension Scheme is both bad economics and bad politics? Discuss. (250 Words)