The Hindu Editorial Analysis- 27th September 2024 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

An Opportunity to Rethink India's Pension System

Why in News?

The system in India has undergone a significant transformation over the years with three major Schemes, the Old Pension Scheme (OPS), New Pension Scheme (NPS), and the Unified Pension Scheme (UPS), marking the different phases of government. Each scheme impacts retirees in different ways, with the OPS often viewed as a more secure system compared to the NPS, which ties retirement funds to volatile market conditions. 

What are the Provisions of the Unified Pension Scheme?

• Assured Pension: This pension will be 50% of the employee's average basic salary earned in the last 12 months before retirement, provided they have a minimum of 25 years of qualifying service.
• The amount will decrease proportionately for those with fewer years of service, down to a minimum of 10 years.
• Assured Minimum Pension: For employees retiring after at least 10 years of service, there is a guaranteed minimum pension of Rs 10,000 each month.
• Assured Family Pension: If a retiree passes away, their immediate family will receive 60% of the last pension amount the retiree received.
• Inflation Indexation: The three types of pensions mentioned above will receive dearness relief, which helps adjust the pension based on inflation.
• The adjustment will be calculated using the All India Consumer Price Index for Industrial Workers.
• Lump Sum Payment at Retirement: Besides gratuity, employees will get a lump sum payment when they retire. This will be equal to 1/10th of their monthly salary (including dearness allowance) for every six completed months of service.
• This lump sum payment will not affect the amount of the assured pension.
• Gratuity: This is a payment made by an employer to employees as a reward for their services.
• Choice for Employees: Employees have the option to remain under the NPS (National Pension System). However, they can only make this choice once, and it cannot be changed later.

What are the Key Differences between UPS, Old Pension Scheme (OPS) and National Pension Scheme (NPS)?

• Pension Calculation Method:
  • In the Old Pension Scheme (OPS), the pension was set at 50% of the last basic salary along with the Dearness Allowance (DA).
  • In the New Pension Scheme (UPS), the pension is calculated as 50% of the average basic salary plus DA earned in the last year before retirement. This means that if an employee gets a promotion right before retiring, their pension could be slightly lower.
• Employee Contribution:
  • In OPS, there was no requirement for employee contributions.
  • In UPS, employees must contribute 10% of their basic pay, while the government contributes 18.5%.
  • Under the National Pension System (NPS), a 10% contribution from the employee’s basic salary is required, and the government contributes 14%.
• Tax Benefits:
  • Central government employees can receive tax benefits for the government's contribution to the NPS scheme. They can claim a 14% deduction under the Income Tax Act, 1961, applicable in both the old and new tax systems.
  • Since there were no employee contributions in OPS, they are not eligible for any tax benefits.
  • The government has not yet clarified whether employee and government contributions in UPS can receive any tax benefits.
• Higher Minimum Pension in UPS:
  • Under the UPS scheme, the minimum pension is Rs 10,000 per month after at least 10 years of service.
  • Currently, the minimum pension is Rs 9,000 after the same service period.
• Lumpsum Payments:
  • OPS allowed a lumpsum payment of up to 40% of the pension, which reduced the monthly pension amount.
  • UPS provides a lumpsum payment at retirement, calculated as one-tenth of the monthly salary plus DA for every six months of service, without affecting the monthly pension.

What is NPS?

What can be the Fiscal Implications of UPS?

• High Debt-to-GDP Ratio: The Unified Pension Scheme (UPS) is expected to have a major financial impact on governments that already have a lot of debt and a high debt-to-GDP ratio.
• The expenses of this scheme could put additional pressure on government finances.
• Significant Fiscal Pressure: A study by the Reserve Bank of India in September 2023 indicated that if all states moved to the Old Pension Scheme (OPS), the financial burden could be as much as 4.5 times greater than that of the National Pension System (NPS).
• This increase could lead to costs reaching up to 0.9% of the GDP each year by the year 2060.
• There are worries about how the UPS will affect the finances of the Union government since it is quite similar to the OPS.

Conclusion

UPS aims to balance the fiscal cost with employee aspirations. It addresses the uncertainty of the National Pension Scheme (NPS) and the high fiscal burden of reverting to the Old Pension Scheme (OPS). UPS combines elements of both OPS (defined benefit) and NPS (contributory), providing a defined return on the pension pool and reducing market risk. With assured returns and inflation protection, the UPS is expected to increase the overall pension fund, mitigating some risks associated with debt burden.