OPS VS NPS

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05 Jan OPS VS NPS

Posted at 05 Jan 2024 in Current Affairs, Daily Current Affairs for UPSC by
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UPSC MAINS SYLLABUS GS2 PAPER: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation

WHY IN THE NEWS? 

Recently, Maharashtra cabinet cleared a proposal that offers State Government employees who joined service after November 2005 (qualification date for New Pension scheme (NPS)) to avail themselves the benefit of the Old pension scheme (OPS). The decision has come days after various Government & semi-government employees struck work demanding restoration of OPS. 

DIFFERENCE BETWEEN OPS & NPS: 

  1. In Old Pension scheme (OPS), the Government pays 50% of average of last 10 months pay. There is no contribution by the employee or Government into fund but paid from Consolidated fund of India. 
  2. However in the New Pension Scheme (NPS), the employee pay a fixed share which is equalled by the Government.
  3. The Old Pension scheme (OPS) was available only to the Government servants while the New Pension Scheme (NPS) extends to all citizens aged between 18-65 years.
  4. While OPS covers Government & organized sector employees through EPS (Employee Provident scheme), the NPS is available to all subscribers even in unorganised sector (Unorganised sector is defined under Social security Act 2008 as an Organisation where total no. of workers do not exceed 10 employee)
  5. In OPS, the minimum term of employment ranged between 10-20 years while there is no such minimum term of employment that exists in NPS.
  6. In OPS, there is no portability across job changes while NPS provides flexibility as it is pension scheme is portable across jobs.
  7. The OPS acts as pooled account while NPS provides for Individual pension account (IPA) thus better targeting of returns. 
  8. While OPS is not regulated by any particular agency, NPA is regulated by PFRDA.

WHY EMPLOYEES ARE DEMANDING OPS? 

  1. At the tie of retirement of the employee, the OPS offers a fixed monthly pension of 50% of the last drawn salary.
  2. While in NPS, 60% of pension fund is tax-free when redeemed but the remainder is taxable and remains invested in annuities.
  3. OPS has no risk involved as the Government bears the complete responsibility of the guaranteed pension at the end of tenure.
  4. However, NPS involves certain market associated risk as the monthly amount is invested in market securities thus liable to fluctuations.
  5. While OPS has no tax deductions, in NPS there is tax deductible on annual investments of up to ₹1,50,000 under Income Tax Act 1961.

WHY GOVERNMENT HAS REVERTED TO NPS? 

  1. As per the CAG report, the Centre’s committed expenditure covers 37% of the total expenditure which means the Government has lesser flexibility to determine where revenue expenditure shall be spent.
  2. 19% of this committed expenditure is spent on paying pensions while 14% is driven towards wages & salary of the employees.
  3. In states like Gujarat & Karnataka, the corpus of pension is larger than salary. For example, in Himachal Pradesh, pensions accounts for almost 80% of the state’s own tax revenues. 
  4. At the same time, India’s life expectancy has increased from 63 years in 2002 to 70 years in 2019 (NFHS-5), thus further increasing fiscal burden on the Government.
  5. Thus Government adopted for NPS where the employee shares equal burden of his/her pension in the future.

CONCLUSION: 

However due to various strikes and low fiscal health of various states like Rajasthan, Chhattisgarh, Gujarat, Karnataka and now Maharashtra has forced them to revert back to OPS where the Government need not pay monthly instalments to equal employee’s share though this may create fiscal burden on the “future generation”. 

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UPSC PRELIMS 2024 PRACTISE QUESTION: 

Q1: Consider the following statements regarding Old Pension Scheme (OPS) & New Pension scheme (NPS) often seen in the news: 

  1. While OPS covered only Government employees, NPS extends to all citizen of India
  2. Unlike OPS, NPS is available to all subscribers even in unorganised sector
  3. Unlike OPS, there is no minimum term of employment required in the NPS
  4. Both OPS & NPS are regulated by PFRDA

How many of the above statements is/are correct? 

a. Only one

b. Only two

c. Only three

d. All four

ANSWER: b

 

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