State elections and the troubling return of the old pension scheme

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Source: The post is based on the article “State elections and the troubling return of the old pension scheme” published in the Livemint on 2nd November 2022.

Syllabus: GS 2- Governance

Relevance: About reviving old pension scheme (OPS).

News: The poll promises in ongoing state elections are always debatable. The Himachal Pradesh election witnessed a promise of revival of the old pension scheme (OPS) for state government employees.

Before this, three state governments had already notified the PFRDA of their switch to the OPS: Chhattisgarh and Rajasthan and Jharkhand.

About the Old Pension Scheme (OPS) and National Pension Scheme
Must read: Comparison of National Pension Scheme with Old Pension System – Explained, pointwise

The OPS was a defined-benefit scheme with an entitlement defined (by the fifth pay commission) at 50% of the last salary drawn.

Due to its drawbacks, State governments shifted to a new pension scheme (NPS) without any coercion (except in West Bengal).

National Pension Scheme: The NPS is like pension systems elsewhere in the world. It is based on the amounts contributed by the employee and employer over the working life of the employee, and the market yield obtained on the consolidated pension fund. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Note: Pensions for defence personnel are paid by the central government. This is the sole exemption from NPS, and continues to be paid on the defined-benefit system.

Why does the OPS is bad for state economics?

a) In addition to inflation indexation through dearness allowance adjustments, OPS wage was indexed to pay-scale revisions prescribed by successive pay commissions, b) The OPS benefits only retirees, on the other hand, it squeezes the state’s exchequer from which welfare benefits flow to the common person, c) By implementing the scheme at present, the state governments is likely to become insolvent by the time their defined benefits become due.

Read more: OPS is bad for economics
What should be done?

Municipalities and panchayats in India are subject to legislation passed at the state level. Instead of implementing OPS, the government should improve the state exchequer by transferring funds to municipalities to improve the condition of roads and sanitation, increase municipal school teacher salaries and public health services.

Read more: Why the Old Pension Scheme is both bad economics and bad politics
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