BRING BACK OLD PENSION SCHEME-READ Bharat pensioner NEWS MAGAZINE Nov. 2022 issue
BRING BACK OLD PENSION SCHEME-READ Bharat pensioner NEWS MAGAZINE
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Data | Making a case for the Old Pension Scheme
If the more favourable Old Pension Scheme is to be financially sound, the focus should be on increasing revenues to fund it
After Rajasthan and Chhattisgarh, Punjab is the latest State that has announced its plan to revert to the Old Pension Scheme (OPS). Many have argued that this is a fiscally irresponsible move. We argue why and how we must go back to the OPS.
The OPS is an assured inflation-indexed monthly family pension till you (and your spouse) live(s). The OPS level is linked to the last pay you drew. The NPS is a corpus from which you can draw a pension after retirement. Its value is determined by the market prices in which the corpus is invested.
There are many issues with the NPS. One, as Chart 1 shows, the amount of monthly pension you would draw (for the same contribution during service) with three hypothetical market rates of return is significantly lower for NPS.
Hover over the charts to find the exact figures
Charts appear incomplete? Click to remove AMP mode
Two, it is dependent on the vagaries of the market prices of equity/bonds in which the corpus is invested. To be sure, the markets do not crash often and in the long run they go up rather than down. But it is still a lottery. If there is a crash, the downside has to be absorbed by the retirees. According to a 2008 OECD study, the global financial crisis had wiped a total of $5 trillion off the value of private pension funds in rich countries compared to the start of the year. It’s true that this is the value of assets on paper, but such a fall can, and did, induce withdrawals among panic-stricken retirees who didn’t have age on their side to be in the long game of speculation.
Three, the OPS is a fixed government expenditure irrespective of an economic slowdown or a stock market crash, which makes it a good counter-cyclical policy measure during a crisis. In fact, the Sixth Pay Commission in India did precisely this during the Great Recession of 2008.
It has been argued that the OPS is a big hole in the exchequer’s pocket (25% of the States’ budget). This number is misleading because three other parts of States’ revenue receipts — tax the Centre collects on behalf of the States (SGST, a part of direct taxes, etc.); non-tax revenue that the States collect; and non-tax grant that the Centre shares with the States — have not been taken into account. Chart 2A shows that the OPS outlays, when calculated correctly, are less than half of 25%. Additionally, as Chart 2B shows, when the revenues (as a share of State GDP) go up, the share of pensions falls. So, shouldn’t the focus then be on mobilising revenues instead of cutting expenditures? But how?
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Chart 3 plots the tax-GDP ratio (State plus Centre’s taxes) for 18 of the G20 countries. India is the fifth country from the bottom and performs poorly among BRICS nations. Even within that, two out of three rupees comes from indirect taxes, for which the poor have to pay the same as the rich for a commodity. So, by increasing direct taxes — in particular corporate taxes — enough room can be created to ensure decent pensions for all.
Not only is there enough room in corporate taxes, a lot more can be mobilised if India were to target property and wealth taxes, which are almost zero ( Chart 4A ). Not surprisingly, India ranks the lowest among the 18 of G-20 countries. At one point, India did have some property tax, however insignificant, which rose between 2005 to 2012 but has fallen precipitously since ( Chart 4B ).
Perhaps there is a need to rationalise the level of pensions under the OPS to make room for non-permanent workers. But doing away with the old pension altogether is like throwing the baby with the bath water.
Rohit Azad & Indranil Chowdhury teach Economics at JNU and PGDAV College, Delhi University, respectively
rohit.jnu@gmail.com and chowdhury.indranil@gmail.com
Source: Reserve Bank of India, IMF’s World Revenue Longitudinal Data set (WoRLD)
Also read: Data | With poor pension rates and high health costs, is India ready for the next demographic phase?
After Rajasthan and Chhattisgarh, Punjab is the latest State that has announced its plan to revert to the Old Pension Scheme (OPS). Many have argued that this is a fiscally irresponsible move. We argue why and how we must go back to the OPS.
The OPS is an assured inflation-indexed monthly family pension till you (and your spouse) live(s). The OPS level is linked to the last pay you drew. The NPS is a corpus from which you can draw a pension after retirement. Its value is determined by the market prices in which the corpus is invested.
There are many issues with the NPS. One, as Chart 1 shows, the amount of monthly pension you would draw (for the same contribution during service) with three hypothetical market rates of return is significantly lower for NPS.
Hover over the charts to find the exact figures
Charts appear incomplete? Click to remove AMP mode
Two, it is dependent on the vagaries of the market prices of equity/bonds in which the corpus is invested. To be sure, the markets do not crash often and in the long run they go up rather than down. But it is still a lottery. If there is a crash, the downside has to be absorbed by the retirees. According to a 2008 OECD study, the global financial crisis had wiped a total of $5 trillion off the value of private pension funds in rich countries compared to the start of the year. It’s true that this is the value of assets on paper, but such a fall can, and did, induce withdrawals among panic-stricken retirees who didn’t have age on their side to be in the long game of speculation.
Three, the OPS is a fixed government expenditure irrespective of an economic slowdown or a stock market crash, which makes it a good counter-cyclical policy measure during a crisis. In fact, the Sixth Pay Commission in India did precisely this during the Great Recession of 2008.
It has been argued that the OPS is a big hole in the exchequer’s pocket (25% of the States’ budget). This number is misleading because three other parts of States’ revenue receipts — tax the Centre collects on behalf of the States (SGST, a part of direct taxes, etc.); non-tax revenue that the States collect; and non-tax grant that the Centre shares with the States — have not been taken into account. Chart 2A shows that the OPS outlays, when calculated correctly, are less than half of 25%. Additionally, as Chart 2B shows, when the revenues (as a share of State GDP) go up, the share of pensions falls. So, shouldn’t the focus then be on mobilising revenues instead of cutting expenditures? But how?
Click to subscribe to our Data newsletter
Chart 3 plots the tax-GDP ratio (State plus Centre’s taxes) for 18 of the G20 countries. India is the fifth country from the bottom and performs poorly among BRICS nations. Even within that, two out of three rupees comes from indirect taxes, for which the poor have to pay the same as the rich for a commodity. So, by increasing direct taxes — in particular corporate taxes — enough room can be created to ensure decent pensions for all.
Not only is there enough room in corporate taxes, a lot more can be mobilised if India were to target property and wealth taxes, which are almost zero ( Chart 4A ). Not surprisingly, India ranks the lowest among the 18 of G-20 countries. At one point, India did have some property tax, however insignificant, which rose between 2005 to 2012 but has fallen precipitously since ( Chart 4B ).
Perhaps there is a need to rationalise the level of pensions under the OPS to make room for non-permanent workers. But doing away with the old pension altogether is like throwing the baby with the bath water.
Rohit Azad & Indranil Chowdhury teach Economics at JNU and PGDAV College, Delhi University, respectively
rohit.jnu@gmail.com and chowdhury.indranil@gmail.com
Source: Reserve Bank of India, IMF’s World Revenue Longitudinal Data set (WoRLD)
Also read: Data | With poor pension rates and high health costs, is India ready for the next demographic phase?
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The demand for restoring the old pension scheme
How will the National Pension Scheme benefit the employees ? What are the changes introduced in the scheme ?
The story so far: On February 23, Rajasthan Chief Minister Ashok Gehlot announced restoration of the old pension scheme for the government employees, who joined the service on or after January 1, 2004. The announcement meant that the National Pension System (NPS) would be discontinued in the State. Following this, another Congress-ruled State, Chhattisgarh announced restoration of the Defined Pension Benefit Scheme (DPBS/OPS).
In the recently concluded Uttar Pradesh assembly election, Samajwadi Party president Akhilesh Yadav had announced the restoration of OPS, drawing the support of several government teachers and employees in the process. The BJP had maintained that restoration of the old system would cause an unnecessary financial burden on the government. The demand has resonated in other parts of the country. In the last week, protests were organised in J&K, Punjab, Andhra Pradesh, Himachal Pradesh and Madhya Pradesh. Trade unions across the country organised a two-day strike on March 28 and 29 and demanded scrapping of the old pension scheme. The Finance Ministry had earlier ruled out proposals by a federation of Central and State governments employees saying that the “changes will be financially untenable.”
What is the old pension scheme or the Defined Pension Benefit Schemes?
The scheme assures life-long income, post-retirement. Usually the assured amount is equivalent to 50% of the last drawn salary. The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.
What is the National Pension System (NPS)?
The BJP-led Union government under Prime Minister Atal Bihari Vajpayee took a decision in 2003 to discontinue the old pension scheme and introduced the NPS. The scheme is applicable to all new recruits joining the Central Government service (except armed forces) from April 1, 2004. On introduction of NPS, the Central Civil Services (Pension) Rules, 1972 was amended.
It is a participatory scheme, where employees contribute to their pension corpus from their salaries, with matching contribution from the government. The funds are then invested in earmarked investment schemes through Pension Fund Managers. At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed. It can have two components — Tier I and II. Tier-II is a voluntary savings account that offers greater flexibility in terms of withdrawal, and one can withdraw at any point of time, unlike Tier I account. Even private individuals can opt for the scheme.
What were the changes introduced in 2019?
In 2019, the Finance Ministry said that Central government employees have the option of selecting the Pension Funds (PFs) and Investment Pattern in their Tier-I account. The default pension fund managers are the LIC Pension Fund Limited, SBI Pension Funds Pvt. Limited and UTI Retirement Solutions Limited in a predefined proportion.
Who is the regulatory authority to manage the funds of government employees that are linked to the market?
The Pension Fund Regulatory and Development Authority (PFRDA) is the regulator for NPS. PFRDA was set up through the PFRDA Act in 2013 to promote old age income security by developing pension funds to protect the interest of subscribers to schemes of pension funds.
What is the subscriber base?
As on February 28, there were 22.74 lakh Central government employees and 55.44 lakh State government employees enrolled under the NPS.
What is the latest directive from the government on the pension system?
The Department of Personnel and Training (DoPT) informed Parliament on March 24 that there is no proposal to reintroduce the old pension scheme for Central government civil employees under consideration of the Government of India. Union Minister Jitendra Singh said that the returns being market-linked is a basic design feature of the NPS. However, pension being a long-term product also enables the investments to grow with decent returns, despite short term volatility. “Further, the prudential guidelines stipulated by the PFRDA, the skills of the professional Fund Managers chosen through a rigorous process, and choice of asset allocation across various asset classes (Equity, Corporate Bond, Government Securities) enable the subscriber’s accumulations to grow over the long term, riding over the short term volatility,” he said.
What will be the number of government employees impacted when Rajasthan and Chattisgarh revert to the old system?
According to Rajasthan Karmachari Samyukta Mahasangh president Gajendra Singh, the move would benefit over 4 lakh employees. In Chattisgarh, the move will benefit over three lakh employees, who joined service after January 1, 2004.
