The government rolled out the national pension scheme on 1st January 2004, otherwise known as the new pension scheme. It is applicable to all government and non-government employees, barring the armed forces. It has become a point of contention recently, with opposition political parties denouncing it and instead promising to bring back the old pension scheme to lure voters. Five states have already switched back to the old pension scheme. The latest example of the uproar against the new pension scheme took place in Haryana, where thousands of employees marched a protest from Panchkula to Chandigarh, demanding the restoration of the old pension scheme. The government’s latest pension scheme for the armed forces called ‘SPARSH (System for pension administration raksha)’ also crashed on 1st May 2022 when over 60,000 veterans were gutted to know that their pension was not credited. What’s happening to the subject of pensions in India and is the new pension scheme really better than the old one?
WHAT IS PENSION AND WHY IS IT IMPORTANT
Pension is a post-retirement source of income for employees so that they can continue to maintain their livelihood without a compromise in their current living standards, It serves as a means for financial stability and security after retirement. In India, many senior citizens depend heavily on pensions for their needs, for some, it is the only monetary provider and can decide between living a decent life and one devoid of basic needs like food and shelter. As we know, India overtook China to become the most populated country in the world which also means that it would have to cater for a large chunk of senior citizens in the near future. According to the elderly India 2021 report, the population that was in the age bracket of 60 years or more, was 10.1% in 2021 and is further likely to increase to 13.1% in 2031. It is thus imperative that we ensure the well-being of the elderly in our country.
WHAT IS THE NEW PENSION SCHEME?
The new pension scheme is an initiative brought forth by the government to create a retirement corpus for employees. It is regulated under the Pension fund regulatory and development authority and is a voluntary contribution savings scheme where the employee makes a defined contribution matched by the government However, there is no contribution made by the government in the case of non-government employees. The funds allocated over a period of time are invested in equity and debts and the return on investment is given back to the employee.
For example, if an employee contributes rupees 10 from his salary of 100, the government makes an equal contribution of 10 rupees too. So the total sum of rupees twenty is invested in the market by fund managers and the return, which depends on market forces is distributed again. At the time of withdrawal, the employee can withdraw 60% of the amount as a lump sum but has to invest 40% in an annuity, the interest on the annuity is to be provided as a monthly pension to the employee.
WHY WAS THE NEW PENSION SCHEME INTRODUCED?
The New pension scheme was announced as a tool to tackle the overflowing debts of the government unable to fund the pensions of employees. In the old pension scheme, the entire pension was earmarked by government-provided funds, which was equal to 50% of the last drawn salary. This led to massive government expenditures with some states having to spend more than 20% of their budget on pensions. This also had an effect on the poor as an overload of pension liability indirectly resulted in inadequate funds for the welfare of the needy. Therefore the government came up with a new pension scheme where in a nutshell, both the employee and the government would contribute an amount every year towards pension.
HOW IS IT DIFFERENT FROM THE OLD PENSION SCHEME?
The Old pension scheme provided pensioners with a fixed amount along with a dearness allowance, which was equal to 50% of the last drawn salary, It was independent of market variables and required no contribution from the employee. There was also a minimum pension guarantee and the government bore the expenditure on pensions through budgetary allocations. The old pension did not require employees to bear a part of their salary for their pension so it was better from the employee’s point of view. It also provided a guaranteed pension based on the last dawn salary and the number of years of service. However, the savings under the old pension scheme are short-lived and might prove disastrous for the government in the long term, if pension debts reach an uncontrollable level, which is already happening in a few states.
The new pension scheme is better for the government as it is not the sole provider anymore but also propels a risk element for the employees, as it invests their money in capital markets and one cannot predict what the returns might be.
WHICH ONE IS BETTER THEN?
Only 2% of the informal workforce has opted for the new pension scheme after it was made available to all citizens and not only government employees in 2009, The new pension scheme can fetch greater returns but many people would prefer a guaranteed fixed income after retirement, as in the old pension scheme. In this case, one might think it would be prudent to switch back to the old pension scheme but it comes with its disadvantages, which would reflect in the long term. Therefore, the choice between these schemes remains subjective and what might be better for one, might not necessarily bear fruit for the other.
The new pension scheme definitely has the potential to fetch greater returns, and it deserves to be given more time. While it does not give us an exact figure about how much pension would one receive, It gives more autonomy to the employee to decide how much he/she would like to invest in his/her pension, It is different from the one size fits all approach of the old pension scheme and can be beneficial if the market returns react positively, At the same time, not everyone would be comfortable with the provisions of the new pension scheme. Many people want a sense of security regarding their pension which the old pension scheme guarantees in terms of a fixed life-long post-retirement pension. It ensures that the employee gets 50% of his/her last drawn salary which can be a great source of post-retirement income and many would be willing to not let go of it in search of greater returns. Both pension schemes come with their benefits and downsides but the most prudent thing to do would be to keep both as an option for the employees. Further, the government should educate the employees about the benefits of the new pension scheme by coming up with awareness programmes for employees in their workplace itself. It is also the utmost right of the employee to be able to choose in what way he would like to secure his pension and this can happen if the government comes up with a hybrid pension scheme, which would work in the best interests of the employee as well as the government. and would provide a balance between the ballooning pension bills of some state governments and a lack of enough pensions for employees.
Author(s) Name: Anirudha Rath (HPNLU Shimla)