In recent months, many political parties have promised to reinstate the Old Pension Scheme as part of their electoral campaigns (OPS).
Opposition-governed states like Chhattisgarh, Rajasthan, Jharkhand, and Himachal Pradesh have announced the restoration of the old pension scheme in the respective states.
With a gamut of litigations filed against the government and the government failing to win even one of them, the government has decided to provide the central government employees with a one-time choice between the Old Pension Scheme and the New Pension Scheme. This order will also be applicable to the Central Armed Police Force (CAPF).
Employees were given time until 31st August 2023 to choose for the old pension scheme.
This choice is available for the people who have applied for services before December 22, 2003 (the day NPS was notified) and joined the service in 2004 (when the NPS came into effect).
The Himachal Pradesh government, led by Chief Minister Sukhvinder Singh Sukhu, also announced on Friday in an official press release that the OPS will be implemented in the state from April 1, 2023.
OLD PENSION SCHEME (OPS)
Under the old pension scheme, the employees are entitled to receive 50%of their last salary plus a dearness allowance (cost of living adjustment allowance given by the government) twice a year upon retirement or their average wages over the past ten months of employment whichever is more beneficial for them.
In order to be eligible for the OPS the employee was required to satisfy a ten-year service requirement.
The employees were exempted from making pension contributions and as a perk for accepting jobs with the government, they used to get a pension after retirement and a family pension too.
Under OPS there was also a provision for the General Provident Fund (GPF). GPF is a type of Public Provident Fund (PPF) account that is available only for government employees in India. It has provision for refundable advances from the accumulated fund under various heads like education, medical emergency, marriage, getting a house etc.
With advancements in the health sector, life expectancy has increased as a result of which OPS has become unsuitable for governments. Due to the increased expenditure incurred on the pension by the government, this scheme was discontinued by the NDA government in 2004.
NEW PENSION SCHEME (NPS)
In the New Pension Scheme, which came into effect in January 2004. According to the new pension scheme government employees contribute 10% of their pay while their employers contribute up to 14%.
After retirement, the employee could withdraw 60% of the amount (tax-free) and the remaining 40% is invested in annuities. This 40% amount is under the tax bracket.
According to a news report in the 2000s, India’s pension debt was reaching uncontrollable levels and in order to reduce these pension liabilities the government launched NPS.
NPS is implemented and regulated by Pension Fund Regulatory and Development Authority (NPST) in the country.
OPS OR NPS: The issue
NPS requires the employees to deposit 10% of their basic pay along with the dearness allowances, which was not the case in OPS.
The advantage of GPF and the amount of pension is also not fixed.
People find this scheme to be market-linked and return based. In NPS 40% of the income is taxable which was not the case under OPS. As a result of this the amount of disposable income in the hands of employees after their retirement is reduced.
The monthly payment under OPS was equivalent to 50% of their last salary drawn whereas in NPS the employees pay a monthly amount which is equivalent to 10% of their salaries.
The central bank has also warned the government that if it chooses to opt for OPS, the risk of financial instability will increase in the government.
The government is diverging its approach towards increasing its capital expenditure and reducing its revenue expenditure by cutting down on pensions and subsidies. The best example of this approach can be seen through the hike in the prices of cooking gas and also through the policy of NPS.
NPS as a scheme reduces governments’ liability and helps in shifting its funds towards the development of infrastructure like building new airports, railways stations etc.