OPS or NPS??

“The farther backward you can look the farther forward you are likely to see”

Welfareism is bankrupting the Indian economy. Every time when the election session is around the corner, political identities, in order to lure the electorate, offer behemoth freebies and farfetched promises without realizing the disastrous consequences thus deteriorating the financial condition of the states.

Last year the Reserve Bank of India came out with a report which showcases the percentage of revenue of the states which goes out just to pay the pensions. You would be surprised to know that Bihar spends almost 60% of its revenue just pay the pensions. Numbers for some of the other states are as follows:

#pension

Have a look at the chart; Himachal Pradesh spends a mindboggling amount of close to 70% of its revenue just to pay the pensions. In order to solve this conundrum, the Government of India in 2004 came up with a plan to move from the Old Pension Scheme (OPS) policy to the new National Pension System (NPS). But what exactly is OPS and NPS? What are the differences and which one is better for a country like India? Lets find out….

An OPS (Old Pension Scheme) is a conventional pension plan that is accessible to government workers who began their employment prior to January 1, 2004. The duration of service and the average pay earned over the last 10 months of employment are used to determine the pension amount under this plan. So basically after the retirement, a government employee is entitled to get 50% for his/her salary as pension along with the additional benefits, such as gratuities and commuted pensions, which are determined according to the employee's service history and average pay. One can have an option that given the service provide by the employees at least this much pay should be given, right? You are absolutely right but the problem starts when the finances of the states get affected. As mentioned earlier, HP spends closed to 70% of its revenue in pensions. This will for obvious reasons will result in the decrease in the capital expenditure which is utilized to upgrade the infrastructure of the state. So this pension payment system was not based on free market conditions thus financing this ever increasing segment of 6.9 million pensioners was stretching the balance sheet of the states. A classic case is that of Rajasthan. RJ spent 23k cr on pensions and 60k crores on salaries and wages. This constitutes 56% of the tax and non-tax revenue. Thus, 10L families constituting about 6% of the 1.6cr families pre-empt 56%of states revenue. #OPS

So the OPS was scrapped and GOI came up with a new pension plan called the NPS (National Pension System). So NPS is a pension program that is supported by the government and open to all Indian citizens which was not the case before. Because it is a defined contribution pension plan, the amount of pension received is determined by the contributions one makes to the plan throughout the working years. For e.g.: a person earning 30,000 p.m. contributes 10% of his salary to the pension fund. Likewise the employer, whether government or private, also contributes another 10%. These contributions are then invested in a variety of asset types, including government securities, debt, and equities, and the returns are correlated to the market. Both the distribution of your contributions among the various asset classes and the change of fund managers are options. And this pension fund is managed major public and private banks of the country. At the time of retirement upto 60% of the total corpus can be withdrawn as a lump sum at retirement, and the remaining 40% must be utilized to buy an annuity that pays a regular pension. #NPS

Because of NPS, the pension fund pay the majority of the cost in accordance with market returns, thus the burden on the state governments to pay for the pensions is minimal. And traditionally, returns from the markets have ranged from 9 to 15%. Second, the money the pension fund receives is used by the business to expand and generate profits thus augmenting the corporate tax base for the state governments. According to one estimate, the Indian markets are receiving close to 7L crore in capital due to NPS.

The primary distinction between NPS and OPS is that the former is a defined contribution program, whilst the latter is a defined benefit one. As a result, the NPS pension you receive is based on the contributions you make and the returns on those contributions, whereas the OPS pension you receive is fixed based on your service length and average pay. States like Rajasthan, Punjab, and Himachal Pradesh are moving back to OPS despite having no solid plans for financing such a system, while rallies calling for the OPS to be rolled back are taking place in states that are close to holding elections, like Haryana. Many prominent economists have also raised a red flag with implementation of the OPS by many states. #policies

Conclusion: There are a lot of opposing viewpoints. Employees who have served for years should be paid well after the retirement. Indeed, there are other legitimate concerns as well. These queries must be addressed otherwise the welfareism will truly ruin the Indian economy, which in no time will lead to a situation we saw a while ago in Sri Lanka. The fact is that neither the state nor the electorate will ultimately gain from these illogical policies.