The Hindu Editorial Analysis- 17th October 2022 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Why in News?

After Rajasthan and Chhattisgarh, Punjab is the latest State that has announced its plan to revert to the Old Pension Scheme (OPS). 

What is meant by the National Pension System?

• With effect from January 2004, the Central Government introduced the National Pension System (NPS) (except for armed forces).
• In 2018-19, the Union Cabinet approved changes to the scheme to benefit central government employees covered by NPS in order to streamline and make it more attractive.
• The NPS was established as a means for the government to eliminate pension liabilities.
• According to a news report based on research from the early 2000s, India's pension debt has reached uncontrollable levels.
• The Central Civil Services (Pension) Rules, 1972 were amended as a result of the introduction of NPS.
• The NPS allows subscribers (government employees) to choose where their money is invested by making regular contributions to a pension account throughout their careers.
• They can withdraw a part of their pension in a lump sum and the rest to buy an annuity to ensure a regular income after retirement.

Implementation

• PFRDA (Pension Fund Regulatory and Development Authority) implements and regulates NPS in the country.
• The PFRDA-established National Pension System Trust (NPST) is the registered owner of all NPS assets.

Features

• The NPS's All Citizens Model allows all Indian citizens (including NRIs) between the ages of 18 and 70 to join.
• It is a participation scheme in which employees contribute to their pension corpus from their salary, with the government matching their contributions. Pension Fund Managers then invest the funds in earmarked investment schemes.
• The Finance Ministry said in 2019 that Central Government employees will be able to choose their Pension Funds (PFs) and Investment patterns.
• At retirement, they can withdraw 60% of the corpus tax-free, while the remaining 40% is invested in annuities, which are taxed.
• The scheme is open to private individuals as well.

What are the Defined Pension Benefit Schemes and the Old Pension Schemes?

• The scheme ensures a lifelong income post-retirement.
• Typically, the assured amount is equal to 50% of the most recently drawn salary.
• The expenditure of the pension is borne by the government. The scheme was phased down in 2004.

Issues

• According to economists, the issue is simple: longer lifespans imply more pension payouts.
• Employees retiring at 60, for example, with an average lifespan of roughly 80 years or more, must be paid for over two decades after superannuation.
• Furthermore, in the event of the pensioner's death, their spouses are entitled to a portion of the pension under the OPS. As a result, the Union and state governments face a massive pension burden.

What issues does the National Pension System have?

• Employees under the old scheme received a pension based on a predetermined formula equal to half of their last drawn salary. They also benefit from the twice a yearadjustment of Dearness Relief (DR). The payout is fixed, and no deductions were made from the salary. Furthermore, the OPS included a provision for the General Provident Fund (GPF).
• The NPS, on the other hand, asks employees to deposit 10% of their basic pay as well as the dearness allowance. There is no GPF benefit, and the pension amount is not fixed. The scheme's main flaw is that it is market-linked and return-based. Simply said, the payout is uncertain

What is the Pension Fund Regulatory and Development Authority?

About:

• 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.

Functions:

• It performs the function of appointing various intermediate agencies like Pension Fund Managers, Central Record Keeping Agency (CRA) etc.
• It develops, promotes and regulates the pension industry under the NPS and also administers the APY (Atal Pension Yojana).

Why in News?

The Royal Swedish Academy of Sciences has decided to award the 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig “for research on banks and financial crises.”

• The 2021 Nobel Prize in Economic Sciences was awarded in one half to Canadian-born David Card (labor economics) and the other half jointly to Israeli-American Joshua D Angrist and Dutch-American Guido W Imbens (analysis of causal relationships).
• Other 2022 Nobel Prizes for Literature, Chemistry, Physics, Medicine and Peace have already been announced.

Note

Unlike the other prizes, the economics award wasn't established in Alfred Nobel's will of 1895 but by the Swedish central bank in his memory. The first winner was selected in 1969.

What Contribution have these Laureates made in the Banking System?

• Ben S. Bernanke:
  • Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history.
  • Through statistical analysis, Bernanke demonstrated how failing banks played a decisive role in the global depression of the 1930s.
  • He showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged.
  • It also helped in understanding the importance of well-functioning bank regulation.
  • Bernanke was the head of the US central bank, the Federal Reserve, when the 2008 crisis hit, and was able to “put knowledge from research into policy”.
• Douglas W. Diamond and Philip H. Dybvig:
  • Both Diamond and Dybvig worked together to develop theoretical models explaining why banks exist, how their role in society makes them vulnerable to rumors about their impending collapse, and how society can lessen this vulnerability. These insights form the foundation of modern bank regulation.
  • They presented a solution to bank vulnerability, in the form of deposit insurance from the government. When depositors know that the state has guaranteed their money, they no longer need to rush to the bank as soon as rumors start about a bank run.
  • Diamond also showed how banks perform a societally important function. As intermediaries between savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.