Himachal Pradesh CM reinstates Old Pension Scheme : Why this is a bad idea
Context – On Friday, January 13, the State government in Himachal Pradesh cleared the decision for its employees to revert to the Old Pension Scheme (OPS), with Chief Minister Sukhvinder Singh Sukhu saying the party has fulfilled a key election promise. Himachal becomes the third Congress-ruled state after Rajasthan and Chhattisgarh to announce such a move.
The Old Pension Scheme, providing assured returns
- The attraction of the Old Pension Scheme lay in its promise of an assured or ‘defined’ benefit to the retiree – giving it its other name, ‘Defined Benefit Scheme’.
- Under this scheme, the pension was fixed at 50 per cent of one’s last drawn basic pay. This means that if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, they would be assured of a pension of Rs 5,000, in addition to the dearness allowance.
- DA — calculated as a percentage of the basic salary — is a kind of adjustment the government offers its employees and pensioners to make up for the steady increase in the cost of living.
Concerns with the OPS
- The main problem with the scheme 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.
- This made the OPS unsustainable.
- For one, pension liabilities would keep climbing since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation.
- And two, better health facilities would increase life expectancy, and increased longevity would mean extended payouts.
The New Pension Scheme
- The New Pension System, originally conceived for unorganized sector workers, was adopted by the government for its own employees starting from January 1, 2004.
- Under this scheme, the defined contribution comprised 10 per cent of the basic salary and dearness allowance by the employee with a matching contribution from the government.
- In January 2019, the government increased its contribution to 14 per cent of the basic salary and dearness allowance.
- Individuals can choose from a range of schemes and pension fund managers ranging from public sector banks and financial institutions to private companies. The risk profiles of various schemes offered by these players vary from ‘low’ to ‘very high’.
(Credits- Canara HSBC life insurance)
The reason behind the reintroduction of OPS in Himachal
- Simply speaking, the OPS provides far higher assured returns. While the NPS invested in the right schemes can be as lucrative, it still does not guarantee the amount that the OPS does. As poll promises go, guaranteeing voters more income has always been popular.
- OPS will bring the state government some short-term gains, as states will not contribute their share towards the pension fund. For employees too, it will result in higher take-home salaries, since they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.
Why is the OPS both bad economics and bad politics?
- Over the last three decades, pension liabilities for the Centre and states have jumped manifold.
- Overall, pension payments by states eat away a quarter of their own tax revenues. For some states, it is much higher. For Himachal, it is almost 80 per cent (pensions as a percentage of the state’s own tax revenues).
- If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts. Funding a small number of former government employees by utilizing a chunk of taxpayers’ money cannot be good politics.
- There is also the larger issue of inter-generational equity. Today’s taxpayers are paying for the ever-increasing pensions of retirees.
Conclusion – Decision to revert back to OPS may prove fatal towards states economic resources. Spending a chunk of state’s resources on a small segment of the population is bad economics.
Source – Indian Express
NEWS – Himachal Pradesh CM reinstates Old Pension Scheme : Why this is a bad idea
Syllabus – GS-3; Economic Policies
