The controversy surrounding the proposed shift from the Old Pension Scheme (OPS) to the New Pension System (NPS) in India has been a subject of national debate. The Central Government first introduced NPS in 2004 with aims to limit the growing pension liabilities. Several states are now demanding a return to the OPS, citing various issues with the new system.
National Pension System: An Overview
Launched in January 2004, the NPS was implemented to curb the burgeoning pension debt, which according to early 2000s research, was spiraling out of control. Unlike the OPS that guaranteed lifelong income post-retirement, the NPS requires subscribers to regularly contribute into a pension account throughout their career.
Under the supervision of the Pension Fund Regulatory and Development Authority (PFRDA), the NPS allows citizens aged between 18-70 (including Non-Resident Indians) to contribute to their pension and decide where their contributions should be invested.
How Does the NPS Work?
At retirement, NPS subscribers can withdraw 60% of their pension corpus in a lump sum, tax-free. The remaining 40% is used to purchase annuities, providing a regular income, albeit taxed. This flexibility of choice and private individual participation are among the features that distinguish NPS from OPS.
Return to the Old Pension Scheme: States’ Demands
Rajasthan is leading the charge to restore the OPS, a move other states including Chhattisgarh, Kerala, Andhra Pradesh, and Assam may emulate. These governments believe that problems such as uncertain payouts and mandatory salary deductions under the NPS outweigh its benefits.
Old Pension Scheme: What It Entails
The OPS promises lifelong earnings after retirement, typically equivalent to half of the retiree’s last-drawn salary. This system, which the government discontinued in 2004, ensured a fixed payout without salary deductions, unlike the NPS.
Issues with the Old Pension Scheme
Despite its advantages, the OPS is not without its challenges. The key concern revolves around the increased lifespan, leading to extended pension payouts. This has resulted in a significant pension burden on both Union and State Governments as they have to pay retirees for over two decades post-retirement.
Concerns Surrounding the National Pension System
The NPS, although lauded for its flexibility, faces criticism mainly due to its market-dependent nature. This means that pension returns are unpredictable, causing concern among employees who prefer the stability of the OPS. The NPS also mandates a 10% deposit of basic salary plus dearness allowance, a provision absent in the OPS.
Pension Fund Regulatory and Development Authority: A Brief
PFRDA is a statutory body established by Parliament to regulate and promote the NPS. Operating under the Ministry of Finance’s Department of Financial Services, PFRDA appoints various intermediate agencies such as Pension Fund Managers, among others, to facilitate an orderly growth of the pension industry.
