Fresh urgency on pension reforms

Source: The post is based on an article “Fresh urgency on pension reforms” published in the Times of India on 19^th July 2022.

Syllabus: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Relevance: New Pension Scheme

News: In recent periods, various state governments have proposed to shift away from the National pensions Scheme (NPS) to the old pension scheme. They are undoing the reform achieved in the past two decades. However, the Union government has been absolutely steadfast in its support for the NPS.

Evolution of the Pensions System in India

Phase-Before the launch of NPS: The Indian pension system covered three categories of people.

(1) Government employees who received them under the traditional pay-as-you-go defined benefit (DB) system. It was applicable to those recruited up until 2003. In this scheme, the Governments have to pay full pension to individuals.

(2) Destitute persons were eligible under the National Old Age Pension Scheme, and

(3) The organised sector workers were covered under the Employees’ Provident Fund Organisation’s pension scheme.

Criticism of the Defined Benefits (DB) Pension Scheme

The pension bill of the Union government increased from 0.24% of GDP in 1980-81 to 0.73% of GDP in 1999-2000.

The pension bill of the Government of India consumed 8% of the revenue receipts in the year 1999-2000 as against 2.9 percent in 1980-81.

In 1998, a committee was established under Surendra Dave to build a new pension system. This was called as the Old Age Social and Income Security (OASIS) Project.

Phase of New Pensions Scheme (NPS)

Project OASIS helped create and socialise new knowledge on the failure of DB systems worldwide. It proposed newer defined contribution (DC) systems that had been rolled out in many countries at that time.

Therefore, in February 2002, the union government announced the creation of a DC pension system. Subsequently, Himachal Pradesh became the first state to join NPS in 2003. Later on, other states also joined the scheme.

About the Direct Contribution (DC) Pensions Plan or NPS

It is a pension scheme for new recruits to the civil services and the uncovered segment of the population, who were recruited starting from 2004.

The Pension Fund Regulatory and Development Authority of India (PFRDA) was also created.

Arguments in favor of the NPS

The NPS has been able to drive fiscal down costs. It has become the cheapest fund management system in India.

In the NPS reform, the government evolves from double payment to only paying contributions for the employee. Further, the young are de-risked from fiscal concerns.

The importance of the NPS will be realized when the persons receiving the DB pension at present would fade away.

The NPS was formulated based on intellectual and evidence-based consensus, public debate and discussion, and good usage of external domain expertise.

At present, India is undergoing an accelerated demographic transition. As per recent data, the share of the youth (aged 15-29) in India has dropped to 26.7% in 2021 in the last decade. Further, it is projected to go down to 22.6% by 2036. Therefore, there is a stronger need for the NPS reform.

What are the causes of the state government’s proposal for the revival of the old pension scheme?

(1) It may be a populist consideration, as there is a demand from a section of employees.

(2) The decision may be partly to allay immediate fiscal pressures because, in NPS, the government has to contribute its share of NPS.