On the issues with Old Pension Scheme – Pension bloat

Source: This post on the issues with Old Pension Scheme has been created based on the article “Pension bloat” published in Live Mint on 7^th November 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Government Budgeting.

News: This article discusses the problems of returning to the Old Pension Scheme.

A detailed article on the Old Pension Scheme (OPS) vs National Pension System (NPS) can be read here.

In recent times the issue of Old Pension Scheme (OPS) vs National Pension System (NPS) has been a hotly debated topic. The demand for returning back to OPS is gaining traction. States such as Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh have already announced a shift back to the OPS.

What are the issues with the Old Pension System?

1. Inequitable distribution of benefits: Only 3.2% of the workforce has a claim over 18% of government revenue.
2. Against fiscal prudence: Fiscal prudence implies using limited resources for investments like health, education, law-and-order, roads, bridges, hospitals, etc. OPS imposes an unsustainable burden on the public exchequer.
3. Unfunded Liability: It means that no contribution is made by employees during their work lives but must be paid out of current government revenue.
4. Constant Increment: The OPS is both wage-indexed (i.e. linked to compensation of the existing workforce and hence hiked with each Pay Commission recommendation) and also indexed to inflation.
5. Issue of inter-generational equity: Future generations will be burdened with higher taxes to service the debt incurred for pension payouts.
6. Rising life expectancy of the population: It will lead to a steady increase in pension emoluments.

Question for practice:

Returning to the Old Penson Scheme can have serious negative impacts on the Indian economy. Discuss.