Making a case for the Old Pension Scheme

Source: The post is based on an article “Making a case for the Old Pension Scheme” published in The Hindu on 17^th October 2022.

Syllabus: GS 2 – Governance

Relevance: benefits of old pension scheme

News: The governments of Rajasthan and Chhattisgarh, Punjab has announced to revert back to the Old Pension Scheme (OPS) form the New Pension Scheme (NPS).

What is Old Pension Scheme (OPS) and New Pension Scheme (NPS)?

OPS is an assured inflation-indexed monthly family pension till a government employee or her spouse live(s). The OPS payment level is linked to the last pay an employee drew while in service.

Whereas, the NPS is the amount that an employee can draw as a pension after retirement. Its value is determined by the market value of the contributions made by the employee.

What are the benefits of Old Pension Scheme (OPS)?

First, the pension drawn in NPS is lower than the OPS (Chart 1).

Second, NPS is dependent on the market prices of equity/bonds in which the amount is invested. Therefore, a crash in the markets can affect the pensioners.

Whereas, OPS is a fixed government expenditure irrespective of an economic slowdown or a stock market crash. This makes it useful in counter-cyclical policy measure during a crisis.

What are the arguments against OPS?

It has been argued that the OPS acts as burden on the exchequer as it accounts for 25% of the States’ budget.

However, it may not be correct because three other parts of States’ revenue receipts (tax the Centre collects on behalf of the States, non-tax revenue that the States collect and non-tax grant that the Centre shares with the States) have not been taken into account.

Therefore, if OPS expenditure is calculated correctly then it would be half of 25%. (Chart 2A)

Further, the share of pensions falls when the revenues (as a share of State GDP) go up. Therefore, the government should focus on increasing the revenues rather than cutting the expenditures.

How can government focus on increasing the revenue for OPS?

Government earns revenues mostly from the indirect taxes and the share of direct taxes is low. (Chart 3)

Therefore, government can focus on increasing the revenues by increasing the direct taxes (ex-corporate taxes) to ensure proper pension can be given to all.

Further, income can also be generated from property and wealth taxes which are almost zero at the present.