Rethink India’s pension system

 Rethink India’s pension system

With the return to welfarism worldwide, India’s proposed Unified Pension Scheme should ensure that retirees are supported by a robust welfare system

pension system in India 

has undergone a significant transformation over the years with three major schemes, the 

1. Old Pension Scheme (OPS), 
2. New Pension Scheme (NPS), 
3. and the proposed Unified Pension Scheme (UPS), marking the different phases of government policy.

 NPS VS OPS 

Each scheme impacts retirees in different ways, with the OPS often being viewed as a more secure system compared to the NPS, which ties retirement funds to volatile market conditions.

UPS 

requires considerable rectification to ensure that it serves the interests of retirees effectively.

A shift with greater individual risk

OPS बस  2004 तक ही रही ?

1 it guaranteed a defined benefit pension to government employees. In this scheme, the pension amount was fixed and determined by the last drawn salary, and the government was solely responsible for disbursing the pensions. 

2 The OPS provided stability and ensured that retirees were insulated from any financial market risks. 

3 Here employees could plan their retirements with a sense of financial security, knowing that they would have a guaranteed income stream throughout their post-retirement years. 

NPS in 2004 

1 In 2004, the Government of India replaced the OPS with the New Pension Scheme (NPS). 

2 बेनिफिट मॉडल से कॉन्ट्रिब्यूशन मॉडल की ओर जाना

Here, the shift was from a defined-benefit model to a defined-contribution model, wherein employee and the government contributed towards a pension fund, which was then invested in financial markets. 

3 मार्केट के उतार चढ़ाव  पर आधारित 

The pension payout under the NPS is linked to the performance of these investments, meaning retirees’ incomes are now subject to the fluctuations of market forces.

4 reducing gov burden / new liberal policy

The shift from OPS to NPS represents the neoliberal tendency to reduce state involvement in welfare provisions and transfer risk to individuals. 

The NPS has drawn criticism because

1 The NPS left retirees vulnerable to market volatility, effectively placing their futures at the mercy of speculative market conditions. 

2 The NPS has drawn criticism because the security once provided by the state under OPS has been eroded.

3  During periods of economic downturn, retirees may face reduced returns, undermining their financial stability.

4 wider concerns about the commercialisation of public welfare programmes and the weakening of the state’s social responsibility.

A return to welfarism

Why gov is returning to old pension scheme ?

 The 2008 financial crisis 

exposed the risks associated with excessive market reliance, leading to calls for stronger social safety nets and a return to welfarism. 

The COVID-19 pandemic 

further amplified these demands, as governments worldwide were compelled to intervene in unprecedented ways to protect the health and livelihoods of their citizens.

The UPS, as proposed by the Narendra Modi government

emerges in this context as an attempt to provide universal pensions while balancing state involvement and market participation.

UPS is still in its nascent stages and requires significant rectification before it can be seen as a viable alternative to the NPS. 

Some concern regarding UPS

Not good return 

Critics have already pointed out that the UPS promises retirement payouts but offers reduced returns compared to the OPS and exposes retirees to the risks of uncertain market-based assets. 

The requirement of 25 years of service for a full pension is a disadvantage for those who join late.

while potential underfunding raises concerns about future pension delays or corpus depletion.

Moreover, the scheme only covers Union government employees, excluding many public sector workers such as teachers, and may disincentivise further pay commissions. 

One of the critical aspects of the UPS that needs attention is the need for greater state intervention to ensure that retirees are not left vulnerable to market forces. 

While the UPS offers a universal framework, its structure should incorporate safeguards against market fluctuations, possibly by providing a minimum guaranteed pension similar to the OPS.

Issue of government contribution

Some other issues 

The UPS hybrid model

Another area that needs reform is the level of government contribution. The UPS hybrid model would not completely mitigate risks associated with market reliance and may fail to offer a balanced pension system.

 Further, ensuring the inclusivity of the UPS across all sectors, including informal labour, is critical. India’s vast informal workforce currently lacks adequate pension coverage. 

The UPS must broaden its scope to provide pension security to all citizens, and not just to government employees.

The comparison of the OPS, the NPS and the UPS illustrates the tension between state-backed welfare and market-driven policies in India’s pension system.

 While the OPS provided a stable and predictable pension income, the NPS shifted retirees’ financial futures into the volatile realm of market investments, creating uncertainties and vulnerabilities. 

The UPS, if properly restructured, could become an important tool in protecting the financial security of retirees and addressing the shortcomings of the NPS, ensuring that India’s retirees are not left to the mercy of market forces but are supported by a robust welfare system.

source the hindu