Controversy has once again increased across the country regarding the New Pension Scheme and Old Pension Scheme.
After which the government has started preparing to make the new pension scheme more effective. At the same time, however, such facts have come to the fore in the SBI report. After which the employees may get a big setback. In fact, it is believed that the employees demanding the old pension scheme may have to be disappointed once again.
With some opposition-controlled states announcing plans to reintroduce the old defined-benefit pension scheme (OPS) for their employees and abandon the reform-oriented Contributory National Pension System (NPS), the central government can reduce the entire government contribution to the NPS.
may suggest an alternative to annual In fact, amid the increasing demand to implement the old pension scheme, the government can make the new pension scheme more effective afresh.
To improve their pension payments, the government is looking at enabling employees to invest more than 40% of the NPS corpus in systematic withdrawal schemes and inflation-indexed products. Under NPS, a person can withdraw 60% of the accumulated corpus from the contributions made during his retirement years during his working years.
Making such withdrawals is also tax-free. The remaining 40% is invested in annuities, which, according to estimates, can offer a pension equivalent to around 35% of the last drawn salary. Government employees used to get 50% of their previous salary as pension under OPS.
If 60% of the contribution is made annually, which is usually matched by the contribution of the federal and state governments, the NPS pension can be closer to 45 percent of the last drawn salary. The concerned government can close the 5% deficit by donating a little more to the NPS. According to an authoritative source, this is said to be a far better option than re-introducing the unstable OPS model. Employees will also be able to withdraw the amount in full from their personal contribution at the time of their departure.
Shocking revelations in SBI Research
Whereas, according to recent SBI research, going back from the new pension scheme (NPS) to the old scheme, also known as PAYG, would amount to financial loss or economic suicide. The state governments of Rajasthan and Chhattisgarh recently announced that they are going back to the old pension scheme to fulfill their election promises.
According to a research note by SBI, the PAYG scheme is not financially sustainable for the state, despite the fact that it is always an attractive option for political parties as current retirees can benefit from the old scheme even if they have Contribution to pension fund has not been made.
Old Pension Scheme Vs New: Problem of Fiscal Burden, Rising Population
Prior to the 1990s, the PAYG scheme was popular in most countries, but according to the report, it was phased out due to the problem of pension debt stability, growing population, obvious burden on future generations and incentives for early retirement . It stated that the PAYG scheme did not have any accumulated corpus or savings stock for pension obligations and thus was a clear financial burden.
As per the data of NPS Trust, the contribution of state level employees is 55.44 lakh till February 2022. According to SBI Note, the current present value of pension liabilities is around 13% of GDP if all states migrate to the old scheme, which is exempt from the current G-Sec yield of 40 years. This is based on a 28-year-old entry-level employee and a 5% inflation rate.
The report also noted that when the population is young the government can provide generous benefits but as the population grows, their pension debt increases. The old age index and old age dependency ratio is expected to increase based on the demographic
profile in India. By 2036, the Aging Index is expected to rise from its current value of 40 to 76, and the aging dependency ratio will increase to 23 percent from its current level of 16 percent. As a result, this would put an additional burden on the working age population, which would be unfair to the younger generation.
