Reversal of OPS: Guaranteed pension is not bad economics

Source: The post is based on the article “Guaranteed pension is not bad economics” published in the Business Standard on 4th May 2023.

Syllabus: GS 2 – mechanisms, laws, institutions and Bodies constituted for the protection and betterment of vulnerable sections.

Relevance: About the reversal of OPS.

News: Many State governments are announcing reversion to the old pension scheme (OPS) and some are speculating to do the same. Many economists have said that this is a bad economics. But that is not correct.

About the National Pension Scheme and OPS

Why do many economists think the reversal of OPS is bad economics?

This is because a) the State has to bear the full burden of pensions, b) the scheme will become fiscally unsustainable in the medium to long run, and c) the unsustainable rise in pension allocation can only come at the cost of essential welfare expenditures allocated to the poor and marginalised sections.

What are the concerns associated with continuing NPS?

Those who defend the NPS say that a) The returns in the market do not stay the same, and it may actually be higher and better than the OPS, b) NPS is inflation-covered because, under normal circumstances, the returns are higher than the inflation.

But they failed to understand that the NPS puts the entire burden of uncertainty on employees alone and not on the employers.

What can be done to provide OPS without any fiscal constraints?

The government should rationalise taxes as these are either negligible or non-existent in India. This can be done by implementing inheritance and wealth taxes.

Instead of OPS, the government can implement a contributory guaranteed pension scheme (CGPS).

How a CGPS can be implemented without any fiscal constraints?

Let’s assume that the employee contribution of CGPS is 10% like NPS and the return is 50% of the last drawn salary like OPS.

The State pays an additional balance of the difference between the 50% guaranteed pension and the market-determined pension amount. If the market returns are higher, then the State governments might get revenue.

Based on the chart, one can derive that, a) When the market return is 9%, the State ends up paying the gap, i.e. 28, but when the return is 12%, it gets to pocket the extra 58%, b) Under the CGPS, the burden is only the employer’s contribution part.

So, it is safe to assume that the CGPS gives guaranteed pensions to the employees without putting the exchequer under additional burden necessarily.