A Backward Step – Why is reverting to the old pension scheme a bad idea? | 18th November 2022 | UPSC Daily Editorial Analysis

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What's the article about?

  • It discusses the ongoing debate between the Old Pension Scheme and the New Pension Scheme.

Relevance:

  • GS2: Welfare Schemes for Vulnerable Sections of the population by the Centre and States and the Performance of these Schemes.

What's the crux of the article?

  • Some National Political parties are advocating a return to the old pension scheme.
  • They are doing this with the short-term consideration of gaining popular support, while ignoring the long term consequences.
  • Returning to the old plan is not really a good idea.

Why is reverting to the old pension scheme a bad idea?

  • It was based on the concept of “defined benefit”.
  • Under it, the pension of government employees was fixed on the basis of the last drawn salary.
  • Thus funding this exorbitant entitlement over time was fiscally challenging  
  • Additionally, the scheme's unviability was demonstrated by the estimate of the implicit pension obligation, which was based on the promises made to public employees and others.
  • Going back to this old scheme will also threaten to undo the hard-won policy gains that have been achieved through bipartisan consensus.

What is the New Pension Scheme?

  • The Union government took a decision in 2003 to discontinue the old pension scheme and introduced the National Pension System (NPS).
  • It is based on the concept of “defined contribution”, fixing the contribution of both the government and the employee.
  • Since its launch, the NPS has built a robust subscriber base.
    • At the end of October 2022, the scheme had 23.3 lakh central government subscribers and 58.9 lakh state government subscribers.
    • Then there are others, including 15.92 lakh subscribers from the corporate sector, and 25.45 lakh from the unorganised sector.

What is the Pension Fund Regulatory and Development Authority (PFRDA)?

  • It is the statutory Authority established by an enactment of the Parliament, to regulate, promote and ensure orderly growth of the National Pension System (NPS).
  • It works under the Department of Financial Services under the Ministry of Finance.

Difference between the Old Pension Scheme and the New Pension Scheme:

  • The basic difference between the old and the new scheme is that while the previous system was rigid, the new one is totally based on investment returns along with accumulations until retirement age, annuity type, and its levels.
  • The primary difference is that the old pension scheme was Benefit Defined whereas NPS is Contribution Defined.
  • In the first case, the benefit is fixed, i.e. it was predetermined how much pension an employee will get linked to his last drawn salary and length of service. This required contribution amount is reverse calculated based on future liability based on actuarial valuation.
  • In the case of an NPS, an employee freezes his contribution as a fixed value or percentage of salary and keeps contributing regularly. Since all contributions are voluntary he may also change the amount at any time. He earns interest on his contribution (NPS has been generating handsome returns as this fund is allowed to invest in equities too).



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