February 7, 2023
Good morning. In today’s either/view, we discuss whether the Old Pension Scheme should be brought back by the states. We also look at the loss of business due to truckers in Himachal Pradesh, among other news.
📰 FEATURE STORY
The Pension Debate: Should states go back to the OPS?
The Old Pension Scheme (OPS) and the New Pension Scheme (NPS) have become hotly debated topics in the past several months. Several parties have already introduced the OPS in their poll promises, while state governments scramble to form committees to study a possible return to the OPS. Given that the RBI has advised caution against the OPS, what is it about the scheme that gravitates state leadership and political parties towards it?
Some call it a tussle between good politics and sound economics, while others call it an election gimmick. Government employees are overwhelmingly in favour of the OPS, while financial experts criticise its sustainability. Which way should states swing?
The current pension-tension is of primary concern to India’s organised labour force, which includes the public and private sectors. The schemes have morphed into a national-level debate because it presents a unique problem of choosing between people’s interests and the government’s capacity to fulfil them.
The OPS is a type of Defined Benefits (DB) scheme. ‘Defined’ implies that after retiring, employees are guaranteed a fixed payout based on their last salary and years of service. It leaves no room for risk or disappointment. ‘Benefit’ implies that the employees need not contribute out of their salaries to a pension fund.
And the cherry on top? The OPS payouts are not taxed and are likely to grow as the state hikes its Dearness Allowance (DA) twice a year. And all of this money comes not from a pension fund but from the Government’s budget allocation.
In India, the OPS awards retired employees with an amount equivalent to 50% of their last drawn salary. But costs associated with the OPS’s largely unilateral benefits transfer eventually led to its demise at the union level. The scheme was making a big dent in government coffers.
In 2002, a High-Level Expert Group submitted a report to the Vajpayee-led government suggesting a transition into a hybrid or Direct Contribution (DC) pension scheme. In 2004, the OPS was discontinued, and the NPS took its place.
Under the new scheme, employees and governments contribute to a retirement corpus. Employees have to slice off 10% of their salary, and the government apportions an amount equalling 14% of the employee’s salary. Pension Fund managers invest this corpus in investment schemes, subjecting it to market volatility.
After retiring, employees can withdraw 60% of the corpus, which is tax-free. The remaining 40% is infused in taxed annuities. Even private sector employees can opt into the scheme, unlike in the OPS.
On the face of it, there are considerable benefits to the OPS. That is why the National Movement for Old Pension Scheme (NMOPS) mobilises government employees across the country to pressure governments to revert to the OPS.
The OPS is predicted to feature in multiple poll promises in 2023 and 2024. The recursion to OPS in Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal, has afforded the cause a political imprimatur. Empowered and emboldened, the NMOPS has resolved to make the pension schemes a pivotal issue in states headed for the poll.
The OPS question brings to light the problem of retirement security across sectors. What this debate only hints at and does not cover is that the benefits of the OPS and NPS extend to 12% of India’s labour force. The rest of the 88% work in the unorganised sector (self-employed, daily wage workers, farmers etc.).
Only a slim portion of this majority depends on the Public Provident Fund (PPF) and Postal Saving Schemes, while the rest are bereft of a post-retirement security net. That the Indian pension system is gasping for reform makes the choice between OPS and NPS all the more consequential at the policymaking level.
VIEW: The OPS is in government employees’ best interest
The primary argument for reverting to the OPS is the considerable deduction that the NPS entails for people’s pension allocation. For instance, government employees receiving ₹700-800 as a monthly pension under the NPS could receive ₹9,000 under the old scheme. If the NPS is fiscally prudent, it is so at the cost of people’s fiscal security during retirement.
The problem is not only the diminished pension corpus that employees receive under the NPS. It is also that the self-contribution leaves barely enough for many workers to sustain themselves financially. Employees part with 10% of their basic pay and their DA without assured returns. Government workers across the country report that the truncated portion of their salaries is barely enough to cover their electricity bills.
Sticking with the NPS can adversely affect recruitment in government jobs. In India, the benefits of the OPS incentivised the population to accrue to government offices. Families yearning for the financial stability of government jobs under the old system will, in due course, prefer their younger counterparts to secure employment in the private sector.
This is a cause for concern because, in the last few years, there has been an uptick in vacancies in government employment. India is also far behind China and the US in overall public-sector employment.
COUNTERVIEW: Governments cannot sustain the OPS
The OPS may be a boon for some (read government employees), but its structure prevents the possibility of scaling its benefits to other sectors. India’s labour code is already vastly complicated, with multiple labour laws and fragmented social security nets. Introducing a scheme that covers only a small working population proves antithetical to reforming the pension system for the better.
It is not without cause that the apex regulator is apprehensive about the OPS. As per the RBI, the old scheme adds an undue burden to the state expenditure. Not only does this threaten the government’s future liability, but also compounds it for the economy. Instead of making timely contributions to a pension fund, the state’s sizeable contribution will accumulate in the future, sizeably inflating the future taxpayer’s burden.
The NPS, however, relieves the government coffers of an accumulated burden. It is a regulated pension fund based on principles of fiscal prudence rather than popular appeasement. For a topical example, we can look at Pakistan, which still follows the old DB system. With a pension expenditure increasing at approximately 25%, experts posit that the government will not be able to bear the fiscal burden within a decade.
In Indian states, pensions devour at least a quarter of their tax revenues. In states with a large government employee population, like Himachal, the proportion of tax revenue spent on pensions shoots up as high as 80%. With the GST having already reduced the states’ taxation powers, the OPS rings serious alarm bells for fiscal sustainability.
- India: Pension system in 2020 – OECD
- Pension battles: Why NPS isn’t ageing well – Mint
- The Pension Bomb And Possible Solutions – Pakistan Institute of Development Economics
- Why Govt Employees Are Up in Arms About the New Pension Scheme – The Wire
- The need to reform India’s pensions system – The Indian Express
What is your opinion on this?
(Only subscribers can participate in polls)
a) State governments should go back to the Old Pension Scheme.
b) State governments should not go back to the Old Pension Scheme.
🕵️ BEYOND ECHO CHAMBERS
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🇮🇳 STATE OF THE STATES
Businesses moving away due to truckers (Himachal Pradesh) – According to a senior executive director at Cremica, the freight charges in Himachal are exceptionally exorbitant compared to other states, and the truck unions here do not permit cars from other states to load products. The company couldn’t continue operations and had to move from Tahliwal in Himachal Pradesh to Rajpura in Punjab two years ago when the Covid-19 outbreak was at its worst.
Why it matters: Cremica wasn’t the only business that had issues with truckers in Himachal Pradesh. The previous three years have seen the closure of up to 43 industrial units. Kala Amb area of Sirmaur registered the maximum shutdowns and amounted to 35 out of 43 closures. A total of 118 shutdowns occurred between 2015 and 2018 because of the truck unions.
Thrissur to turn into a dream theatre (Kerala) – On Sunday, Chief Minister Pinarayi Vijayan opened the 13th iteration of the International Theatre Festival of Kerala (ITFoK) at the Pavillion Theatre in Thrissur. He emphasised the role of theatre in Kerala’s social reforms and stated that the state government was eager to host the festival following the epidemic. Actor Prakash Raj was invited as the chief guest of the event.
Why it matters: In his presidential speech, Minister of Cultural Affairs Saji Cherian said that the ITFoK would not be held merely as a theatrical festival the next year but rather as a massive conglomeration of all Thrissur’s cultural institutions. Theatrical performances help us learn how to listen. It’s a beautiful opportunity for us as artists to get together and share our tales with the public, he remarked.
Jail-themed restaurants create a buzz (Bihar) – Going to jail is one of the last places anyone wants to go. Still, there has been a frenzied rush among the populace to experience the atmosphere of a jail and enjoy a range of cuisines inside jail-themed restaurants that have popped up around Bihar and are quickly becoming popular.
Why it matters: Foodies have been observed swarming to prison eateries to enjoy the fare from Gaya to Bhagalpur, Muzaffarpur to Madhubani, and Patna to Ara. Many people frequent these establishments to experience the atmosphere of a prison while enjoying delicious meals. To make the experience more realistic, ‘jailors’ lock the heavy iron gate after they take your order, and the gate is only opened when you clear the bill.
Government aiming to hike MMR GDP (Maharashtra) – The Eknath Shinde-led state government wants the Mumbai Metropolitan Region (MMR), which includes the city and its satellite towns, to build a $250 billion economy within the next five years as part of its effort to make Maharashtra a trillion-dollar economy. The government wishes to focus on basic amenities and infrastructure and to attract foreign investment in the area to reach this goal.
Why it matters: So far, Mumbai has contributed the vast bulk of MMR’s GDP. However, with significant transportation infrastructure projects already underway, particularly the Sewri-Nhava Sheva Mumbai Trans Harbour Link, there is a fantastic chance for the entire region to establish itself as a significant centre of economic activity. In addition to increasing MMR’s GDP, it will also increase the share of people who will contribute to the GDP.
New bird species found in Manipur (Manipur) – The Kwatha region in the Tengnoupal district of eastern Manipur recently saw the first records of the Rufous-winged Buzzard (Butastur liventer) and Grey-eyed Bulbul (Iole propinqua), two new species of birds in India. The Indian BIRDS journal, a bimonthly, peer-reviewed publication that covers ornithological research and observations on birds of South Asia, has published the discovery reports.
Why it matters: The Yangoupokpi-Lokchao Wildlife Sanctuary includes the Kwatha region where the birds have been located. It has been designated as one of Manipur’s Important Bird Areas (IBA) by BirdLife International, a global alliance of non-governmental organisations that works to protect birds and their habitats. This will attract tourists from across the globe who are avid birdwatchers. Sightings of new birds have lately increased in the northeastern region of India.
🔢 KEY NUMBER
16 – Punjab CM Bhagwant Mann announced the opening of 16 public sand mines, fulfilling an election promise.