Return to old pension plan is big risk for States, warns RBI
- January 17, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Return to old pension plan is big risk for States, warns RBI
Subject : Economy
Section : Fiscal Policy
Concept :
- The likely reversion to the old pension scheme (OPS) by some States is a major risk looming large on the sub-national fiscal horizon, according to the Reserve Bank of India’s report on State finances.
- Among the States, Chhattisgarh, Rajasthan, Punjab, and Himachal Pradesh have so far restored the OPS for government employees.
Old Pension Scheme
- The scheme assures life-long income, post-retirement.
- Under the old scheme, employees get a pension under a pre-determined formula which is equivalent to 50% of the last drawn salary.
- They also get the benefit of the revision of Dearness Relief (DR), twice a year. The payout is fixed and there was no deduction from the salary.
- Moreover, under the OPS, there was the provision of the General Provident Fund (GPF).
- GPF is available only for all the government employees in India.
- Basically, it allows all the government employees to contribute a certain percentage of their salary to the GPF.
- And the total amount that is accumulated throughout the employment term is paid to the employee at the time of retirement.
- The Government bears the expenditure incurred on the pension. The scheme was discontinued in 2004.
Concerns:
- The main problem was that the pension liability remained unfunded — that is, there was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
- The Government of India budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.
- The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
New Pension Scheme (NPS)
- As a substitute of OPS, the NPS was introduced by the Central government in April, 2004.
- This pension programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces.
- The scheme encourages people to invest in a pension account at regular intervals during the course of their employment.
- After retirement, the subscribers can take out a certain percentage of the corpus.
- The beneficiary receives the remaining amount as a monthly pension, post retirement.
- Nodal agency: Pension Fund Regulatory and Development Authority (PFRDA)
- Eligibility:
- Any Indian citizen between 18 and 60 years can join NPS.
- NRIs (Non-Residential Indians) are also eligible to apply for NPS.
- Permanent Retirement Account Number (PRAN):
- Every NPS subscriber is issued a card with 12-digit unique number called Permanent Retirement Account Number or PRAN.
- Minimum contribution in NPS:
- The subscriber has to contribute a minimum of Rs. 6,000 in a financial year.
- If the subscriber fails to contribute the minimum amount, his/her account is frozen by the PFRDA.
- Who manages the money invested in NPS?
- The money invested in NPS is managed by PFRDA-registered Pension Fund Managers.
- At the moment, there are eight pension fund managers.
Difference between NPS and OPS
- The Old Pension Scheme is a pension-oriented It offers regular pensions to employees during retirement. The pension amount is 50% of the last drawn salary by the employee.
- Thus, in OPS, the pension amount is constant.
- On the other hand, the National Pension Scheme is an investment cum pension
- NPS contributions are invested in market-linked securities, i.e., equity and debt instruments.
- Therefore, NPS doesn’t guarantee returns.
- However, the investments, in NPS, are volatile and hence have the potential to generate significant returns.