Politics over pension – on NPS

Source: The post is based on an article “Politics over pension” published in Business Standard on 23^rd November 2022.

Syllabus: GS 2 – Governance

Relevance: concerns associated with Old Pension Scheme.

News: Punjab along with other states such as Chhattisgarh, Rajasthan and Jharkhand have opted to restore the Old Pension Scheme (OPS) from the current National Pension System (NPS).

What is the difference between OPS and NPS?

NPS was adopted by every state except West Bengal for the government employees who joined from 1st April 2004.

NPS and OPS both have tax benefits but the OPS is inflation-linked and there is a hike in pension every six months in the form of dearness allowance (DA).

The government bears the entire cost of the OPS whereas in NPS employees contribution is 10 percent of salary and DA and 14 percent is contributed by the government.

The funds contributed by the government and the employees are deposited in different schemes approved by the Pension Fund Regulatory and Development Authority (PFRDA).

The deposited fund is then invested in the equity and debt market depending on the employee’s choice and subject to guidelines. Therefore, NPS reduces financial burden on the states.

What are the problems with adopting OPS?

OPS acts as a fiscal burden on the states.

For example, Punjab’s projected expenditure on the pension for the current fiscal year is estimated at one-third the state’s own tax revenues. The liabilities would exceed the state’s own tax revenue by 46 per cent if the salaries and interest payments were added to it.

Similar is the case with Gujarat which is in better financial shape than Punjab. The pension and salary costs would amount to 72 per cent of its tax revenues.

Therefore, it is not wise to return to OPS as it acts as burden on the state government and on the taxpayers.