The Reserve Bank of India (RBI) has advised states against switching back to the previous pension system (OPS), which was popular until 2004, because doing so will increase the budgetary burden on the states in the years to come. In contrast to the National Pension Scheme (NPS), OPS, according to the central bank, will result in the buildup of obligations that could eventually become a significant problem.
What did the RBI say on the old pension plan?
The possibility of some states returning to the old pension system is a serious risk that hangs over the subnational fiscal horizon.
“This change results in a temporary reduction in fiscal resources each year. States run the risk of accruing unfunded pension liabilities in the ensuing years by delaying current expenses, according to the RBI’s “Report on State Finances” released on Monday.
States are anticipated to spend a total of Rs 463,436 crore on pensions in 2022–23, up from Rs 399,813 crore in the previous year, according to budget estimates for 2022–23. According to an SBI Research research, the cumulative annual growth rate (CAGR) of pension liabilities for the 12 years that ended in FY22 was 34% for all state governments.
Why are more states choosing OPS?
More states have joined the movement to reinstate OPS in place of the National Pension Scheme, prompting the RBI’s warning (NPS). Following Punjab, Chhattisgarh, Jharkhand, Rajasthan, and Chhattisgarh, Himachal Pradesh has declared its intent to choose OPS. States have discovered that using the funds obtained from the paying employees to pay aged pensions is convenient.
Employees who retired under the OPS were given monthly pensions equal to 50% of their final drawing wages. OPS is regarded as being financially unviable, and state governments lack the resources to finance it. OPS was obviously a financial burden because it had no stock of savings or accrued assets for pension commitments.
According to the SBI Research analysis, it’s interesting that the system is usually a popular exemption for political parties because current retirees can profit from it even though they might not have contributed to the pension fund.
NPS versus the old pension plan
An old pension scheme (OPS), also referred to as the PAYG scheme, is an unfunded pension plan where pension payouts are paid out of current income. In this plan, the current generation of workers’ contributions were specifically used to cover the pensions of current retirees. In order to fund the pensioners, OPS required a direct flow of funds from the current generation of taxpayers.
The PAYG scheme was popular in the majority of nations prior to the 1990s, but it was abandoned due to the inability to sustain pension debt, an ageing population, a clear burden on future generations, and the incentive for early retirement (as the pension is fixed at the last drawn salary), according to an SBI Research report.
NPS is a defined contribution retirement plan. An individual can plan for their retirement while still working thanks to NPS. With regular saving and investing,
During their working lives, NPS makes it easier for them to build up a pension fund. With NPS, you can have a sustainable solution for having enough retirement income as you age or after you reach superannuation.
NPS has been adopted by nearly all state governments for its employees, and it is required for central government employees beginning their employment on or after January 1, 2004, regardless of where they are located. The National Pension System (NPS), which is overseen by the Pension Fund Regulatory and Development Authority (PFRDA), is a contributory pension plan in which employees make contributions equal to 10% of their annual pay (Basic + Dearness Allowance).
In order to help the employees’ NPS accounts, the government gives 14%. With a total asset under management of Rs 4.27 lakh crore as of December 2022, 59.78 lakh state government employees are a part of NPS.
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