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Old Pension Scheme Vs New Pension Scheme. Which one is better?

In the month of May, this year, Chattisgarh became the first state to restore Old Pension Scheme (OPS). After the decision of Chattisgarh government, many state governments have begun showing their willingness to implement OPS. This scheme was discontinued by the Union government in 2004. Following Union government's decision, which was not binding on the states, all the states had discontinued OPS except West Bengal and Tamil Nadu. 


What is Old Pension Scheme?


Under OPS, government empolyees get lifelong income after superannuation. The bearer of the burden of expenditure is the government only. Usually, government pays 50% of the last drawn salary of an empolyee and the Dearness Allowance to the retirees. In addition to this, the pensioners get the benifit of General Provident Fund (GPF). Also, after the death of a pensioner, government pays half of the pension amount to the eligible dependant family member. Minimum pension under this old scheme is 3500 rupees. Furthermore, the pensioners above the age of 80 get the additional pension which increases from 20% to 100% of the basic pension as the age of the pensioner increases. Old Pension Scheme gives pension coverage only to the government empolyees.


What is New Pension Scheme?


New Pension Scheme (NPS) was implemented in 2004. According to PFRDA act of 2013, New Pension Scheme is a contributory scheme. Under NPS, the subscribers can contribute regularly during their working years in their pension accounts. On superannuation, subscribers can withdraw 60% (tax free) of the corpus and the remaining 40% (which is taxed) is used to buy the annuities for a regular income. Empolyees contribute to their corpus from their salaries with the matching contribution from the government. Unlike Old Pension Scheme, the amount of pension is not fixed as NPS is market linked and return based. Also, there is no General Provident Fund (GPF) advantage to the empolyees in NPS. New Pension Scheme not only provides pension coverage to the government empolyees, but also to the empolyees of unorganized sectors, as all the Indian citizens and NRIs, aged between 18-60 years are eligible for this scheme. 


Which one is better?


Old Pension Scheme was discontinued because of the increasing burden of expenditure on the Union as well as state governments. Fifth pay commision gave a generous award to the empolyees, which further increased the burden on the governments. Constant rise in the Dearness Allowance (DA) would also have increased the stress on the government finances. Most importantly, India's current fertility rate is 2.0, which implies that the number of pension earning population would increase sharply in the near future and the young people, who will bear the burden of paying for the pensions, would be less in the numbers. If the state governments and political leaders keep on pushing towards re-introducing populist Old Pension Scheme, it might fetch them some extra votes but the governments might end up in a fiscal hole. 


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Tags: Politics NPS OPS



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