The Pension Debate: Old vs. New Scheme

Author: Neha Chauhan
On 1st October, thousands of central and state government employees, alongside workers from public sector units across more than 20 states, gathered at New Delhi’s Ramlila Maidan for what they called the “Pension Shankhanaad Rally”. Their primary demand was the restoration of the Old Pension Scheme [OPS]. This event not only triggered extensive nationwide discussions on the New Pension Scheme [NPS] but also underscored the importance of the pension scheme debate as a key electoral issue in the upcoming 2024 Lok Sabha polls.
Instituted in the 1950s, the Old Pension Scheme guaranteed government employees a monthly pension amounting to 50% of their final drawn salary, without any contribution required from the employees. It also included a dearness allowance upon retirement or an average of the wages earned in the preceding ten months, whichever is more favourable. However, eligibility for these benefits necessitated a minimum of ten years of service, with the income still liable to be taxed.
In stark contrast, the National Pension Scheme mandates that state government employees contribute 10% of their basic salary plus dearness allowance, with an equivalent contribution from the state. These contributions are then invested in approved pension funds, with returns linked to the performance of financial markets. Upon maturity, 60% of the corpus is tax-exempt, while the remaining 40% is subject to taxation when invested in annuities.
Proponents of OPS emphasise its reliability and security, highlighting that it accounts for inflation and various indices without requiring employee contributions. In contrast, NPS hinges on market performance and employee contributions. The government defends NPS, asserting it places a lighter burden on public funds and offers potential for greater returns. However, a significant portion of government employees opposes market-linked pensions due to concerns that it jeopardises their social security. This unease stems from the uncertainty introduced by NPS, as OPS provides stability and security without employee contributions. Despite government assurances of reduced financial pressure and the promise of higher returns, many government employees remain cautious about pensions tied to the unpredictable market conditions, fearing it may erode their social safety net.
This clash has intensified political rivalries, with opposition-ruled states like Himachal Pradesh, Chhattisgarh, Rajasthan, Jharkhand, and Punjab reverting to OPS. However, this shift towards OPS has raised financial red flags. The Reserve Bank of India has cautioned the shift back to OPS as “a major step backward” in fiscal deficit management. According to its research, the cumulative fiscal burden of OPS could be 4.5 times that of NPS, posing a threat to the financial stability of states.
India’s changing demographics suggest that government pension obligations will continue to escalate. While economists argue that NPS benefits those who consistently contribute and remain in the system for extended periods, they often overlook the uncertainties and human factors, including late entry or early exit from government employment and the unpredictable nature of financial markets.
In this evolving landscape, the question of pension adequacy gains prominence. As India’s ageing population continues to grow, there is an urgent need for a bipartisan approach to create a financially sustainable pension scheme that addresses the needs of retirees. The battle between the Old Pension Scheme and the National Pension Scheme is not just a political showdown but a multifaceted issue that demands a balanced, well-considered solution in the best interests of the nation’s workforce and its economic stability.