Old Pension System will take from the poor and give to the rich

Source– The post is based on the article “Old Pension System will take from the poor and give to the rich” published in The Indian Express on 10th March 2023.

Syllabus: GS3- Indian economy

Relevance– Issues related to public finances

News– Recently, the return to the Old Pension System has been proposed by sections.

What are some facts about OPS and NPS?

OPS is a “pay-as-you-go” scheme. The contributions of current government employees are used to fund the pension liabilities of past government employees. In OPS, the employees are guaranteed an amount equivalent to 50% of their last salary in perpetuity.

NPS was established by the NDA government in 2003. It is a defined contribution scheme. The employees invest a certain fraction of their salary that is complemented by a contribution from the government.

What are the arguments against OPS?

It will have fiscal implications. The only way the OPS can be made sustainable is by either having more government employees or by more borrowing. More employees will lead to inefficiency in governance.

States’ finances will be crippled under the pension burden. A recently released report by the Reserve Bank of India on states’ finances provides a detailed breakdown of states’ expenditures on pensions.

In Rajasthan, the state’s expenditure on pensions as a percentage of its own tax revenues is 28%. In contrast, for example. In Maharashtra, the same percentage is 14%.

States will have to cut down their expenses. Expenses on health, education, and other long-term assets will naturally be the first ones to go.

The losers will be the majority of poor people who will be denied basic services and support from the state. The winners will be the minority of wealthy government employees.

This is a rare example of a policy that explicitly takes away the wealth of the poor to distribute it to the rich. The retiring government employees are amongst the top 5% of income earners in India.

Finally, the sixth and the seventh pay commissions revised the salaries of government employees upwards assuming that they would be under NPS. Therefore, any switch to OPS now is a breach of trust of all citizens.

How can OPS make political sense?

There can be two explanations. One benign, and one disturbing.

Benign explanation– Freebies are not mutually exclusive. Parties desperate to win elections are promising everything to everyone. In the short run, they may even fulfil their promise. Finally, they will cut down on expenditures such as defence, healthcare.

If the current dispensation at the Centre is re-elected, opposition parties will inherit an even better fiscal situation when they eventually come back to power.

Parties may also have miscalculated the political costs and benefits of OPS.

Disturbing explanation– The Opposition has realised that the main obstacle in its quest for power at the Centre is the last-mile delivery of welfare schemes.

The success of these schemes eventually rests on the ability of the lowest layer of government employees to deliver these schemes. OPS may incentivise government employees to sabotage these welfare schemes.