Syllabus
GS Paper 2 – Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.
Context
With the return to welfarism worldwide, India’s proposed Unified Pension Scheme should ensure that retirees are supported by a robust welfare system
Source
The Hindu | Editorial dated 27th September 2024
An opportunity to rethink India’s pension system
India’s pension system has seen major reforms over the years, transitioning from the Old Pension Scheme (OPS) to the New Pension Scheme (NPS) and the proposed Unified Pension Scheme (UPS). While the OPS provided financial stability with a government-backed pension, the NPS shifted the responsibility to individuals through market-linked investments. In the context of a global shift from neoliberalism to welfarism, the UPS has emerged as a middle ground but needs significant improvements to safeguard retirees’ financial futures.
Old Pension Scheme (OPS)
- Defined Benefit System: OPS guaranteed a fixed pension based on the last drawn salary, offering financial security to government employees.
- State Responsibility: The government was solely responsible for disbursing pensions, insulating retirees from market risks.
- Guaranteed Income: Employees had a predictable, steady income stream post-retirement, reflecting the government’s commitment to social security.
New Pension Scheme (NPS)
- Defined Contribution System: NPS requires contributions from both employees and the government, which are then invested in financial markets.
- Market Exposure: Pension payouts are tied to the performance of these investments, making retirees vulnerable to market volatility.
- Neoliberal Shift: The NPS represents a move toward reducing state involvement in welfare and transferring risks to individuals, leading to criticism about weakening social responsibility.
Criticisms of NPS
- Market Volatility: The NPS ties pension payouts to the performance of financial markets, leaving retirees vulnerable to market fluctuations and risking their financial stability.
- Individual Risk Transfer: The shift from the OPS to NPS reflects a neoliberal approach, transferring the risk from the state to individuals, undermining social security.
- Inadequate Protection: Unlike the OPS, the NPS does not provide a guaranteed pension, creating uncertainty during periods of economic downturn.
Proposed Unified Pension Scheme (UPS)
Key Features of the Scheme
- Assured Pension – Employees will receive a pension amounting to 50% of their average basic pay from the last 12 months before retirement, applicable for those who have served a minimum of 25 years.
- There is a proportionate reduction for those with 10 to 25 years of service.
- Family Pension – In the event of the employee’s demise, the family will receive 60% of the employee’s pension
- Minimum Pension Guarantee – Guarantees a minimum pension of ₹10,000 per month for those who have completed at least 10 years of service
- Inflation Indexation – Pensions will be indexed to inflation based on the All-India Consumer Price Index for Industrial Workers (AICPI-IW)
- Lump-Sum Payment – At the time of superannuation, employees will receive a lump sum payment in addition to their gratuity.
- This payment will be 1/10th of the monthly emoluments (pay + DA) for every 6 months of completed service, without reducing the assured pension.
- Eligibility – Existing and future employees will have the option of joining the New Pension Scheme or UPS.
- The choice, once exercised, will be final.
- Provisions of the UPS would also apply to past retirees of the New Pension Scheme.
- Government Contribution – Government’s contribution has also been increased from 14 to 18.5%.
Criticisms of UPS
- Market Exposure: Similar to NPS, the UPS still exposes retirees to market-driven assets, which can lead to reduced returns compared to the OPS.
- Underfunding and Delays: There are concerns about potential underfunding, which could lead to delays in pension payouts or even depletion of the pension corpus.
- Limited Coverage: The UPS applies only to Union government employees, excluding many public sector workers and informal labor sectors from its benefits, leading to unequal pension security.
Need for Reform
- Greater State Intervention: UPS should incorporate minimum guaranteed pensions to protect retirees from market fluctuations, similar to OPS.
- Inclusivity: The scheme should extend to informal labor and all public sector workers, ensuring broader pension coverage for India’s vast workforce.
- Government Contribution: A higher and more secure government contribution is needed to reduce risks associated with market dependence.
Conclusion
The evolution from OPS to NPS and now the proposed UPS illustrates the tension between state-backed welfare and market-driven policies in India’s pension system. As the world rethinks neoliberal policies, India’s pension system must strike a balance between market participation and state responsibility. The UPS, if restructured with stronger safeguards and broader coverage, could be a key tool in protecting retirees from market vulnerabilities, ensuring a robust welfare system for India’s aging population.
Related PYQ
Despite Consistent experience of high growth, India still goes with the lowest indicators of human development. Examine the issues that make balanced and inclusive development elusive? [ UPSC Civil Services Exam – Mains 2019]
Practice Question
Discuss the evolution of India’s pension system. How do these schemes reflect the changing role of the state in social welfare? [150 words]
Guidelines to Answer
- Introduction:
- Begin by briefly mentioning the importance of pension systems for social security and their role in providing financial stability to retirees.
- Introduce the phases of pension schemes in India: OPS, NPS, and UPS, highlighting their chronological evolution.
- Body:
- Link these schemes to the changing role of the state from a welfare provider to a facilitator of market-driven policies.
- Conclusion:
- Summarize the overall trend towards reduced state involvement in pensions.
- Emphasize the need for reforms to balance state responsibility and market participation to ensure pension security for all.