Pension system should be fair and sustainable

Source: The post is based on an article “Pension system should be fair and sustainable” published in Live Mint on 12^th October 2022.

Syllabus: GS 2 – Governance

Relevance: issues associated with the old pension system.

News: There is a growing push to switch back to India’s old system of state pensions.

The promises are being made to lure the voters in the upcoming elections.

These types of promises make fiscal reforms difficult and acts burden on the state.

How does the NPS and old pension schemes work?

The central and state government pensions were moved to the National Pension System (NPS) on January 1, 2004.

It acts like a retirement fund that promises to pay back a monthly pension depending on the amount of money contributed by workers during their work life.

It is like a long-range investment scheme whereas the previous pension system assured a fixed amount depending upon the one’s last drawn salary and was adjusted with inflation.

The old pension system provides the workers a fixed pay out based on the last drawn salary.

What are the problems with the old pension system?

Offering a fixed pensions can turn into an excessive burden for the government. Thus, the decision to move back to the old pension system can affect the finances of the states as they are already under heavy pension obligations.

A State Bank of India research report estimated that pensions involve big proportion of amount of the total committed expenditures of states. It was 125% of their own revenue receipts for the year 2020-21.

States that are poor will find it hard to afford the pension amount as they have other uses for the public money.

Further, the government has limited resources to perform a huge set of tasks and moving to an old pension system will be difficult for the government.

What can be the course of action?

States should stay with the NPS which is fiscally sensible and put employs of the private and public sector on an equal footing.

A probable long-term solution is to ask workers to put money into a savings scheme that would pay it back later instead of putting money in the pension schemes of the government.