Explained: What Is The Old Pension Scheme Approved By Punjab Cabinet?
Rajasthan, Jharkhand and Chhattisgarh have reinstated the Old Pension Scheme. It was a raging issue in the Himachal election. We decode what is the scheme and differences with the New Pension Scheme.
Punjab Chief Minister Bhagwant Mann on Friday announced that the state cabinet had approved the implementation of the old pension scheme (OPS). He said that the notification for the same has been issued.
Addressing press the, CM said, “OPS has been approved by the cabinet. Many employees will be benefited under the old pension scheme. Notification has been issued.” The decision will directly benefit more than 1.75 lakh government employees, a statement from CMO said.
Earlier, the government of Rajasthan, Jharkhand and Chhattisgarh had reinstated the Old Pension Scheme. The OPS was a raging issue in the recently concluded Himachal Pradesh election, which went to polls on November 12. To woo the voters, Congress has promised in its manifesto to restore the OPS if elected to power.
The old pension scheme, under which the entire pension amount was given by the government, was discontinued in the country from April 1, 2004.
What Is Old Pension Scheme (OPS)?
Old Pension Scheme or OPS is a post-retirement benefit for government sector employees that assured a definite amount to be paid to the employee after his superannuation. It was replaced by a New Pension Scheme, which came into effect on 1st April, 2004.
Popularly known as ‘Defined Benefit Scheme’, OPS secured the future of government employees with an amount which is 50% of their basic salary.
So, if the basic salary is Rs 10,000, the person would receive a fixed amount of Rs 5,000 per month as pension from the government. With an increase in Dear Allowance twice a year, the government tries to balance the salary with the rising cost of living. Hike in DA also gives way for a higher salary and hence higher pension.
Who Pays The Amount In OPS?
The entire amount of the Old Pension was paid by the government. The budget for pensions used to be announced during the Budget announcement every year. Furthermore, the federal and state government were responsible for the payment of the yearly DA increase in the pension as well.
Why Was OPS Stopped?
OPS was a financial liability for the government without any source to derive income from the corpus collected as savings of the government employee. Though the announcement would be made every year, the carrying forward capacity of the scheme was not certain.
The BJP-led NDA government in December 2003 announced to replace the Old Pension Scheme by New Pension Scheme (NPS) from 1st April, 2004.
A report of State Bank of India says that pension liabilities, salary payments and interest payments form 56% of state expenditures that is committed which is met out of state revenue receipts. The report, published in March this year, adds that moving back to the Pay-As-You-Go (PAYG) old pension scheme would have a disastrous impact on the coming generation.
The report had mentioned that if more states followed the steps of Rajasthan and Chhattisgarh, there would be unsustainable burden of future generations.
“If we assume that all states migrate to the old scheme, and assuming an entry level age of 28 years, with a 5% inflation indexation, the current present value of the implicit pension liabilities is around 13% of GDP, discounted by the current G-sec yield on 40 years. This is the implicit pension debt that will be unfunded as per the PAYG scheme,” the report said.
OASIS Report: Origin Of The New Pension Scheme
The discussion over the increasing liability on the governments as pension payments was always there. A report on this issue was ordered in 1998 by the Union Ministry of Social Justice and Empowerment. It was delivered in January 2000. The purpose was to provide some kind of future security to the workers of unorganised sector. Nowhere was it about replacing or changing the then-in-place pension scheme.
It was called the Old Age Social and Income Security (OASIS) initiative. The report suggested investment of pension corpus accumulated by the employee throughout the service. It advised investors to consider three different types of funds that will be offered by six fund managers: safe (which allows up to 10% equity participation), balanced (which allows up to 30% equity investment), and growth (which allows up to 50% equity investment). The remaining amount would be invested in government or business bonds.
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It added that at least Rs 500 be added to the scheme annually. This gives each individual his/her own pension amount. Now, a definite amount was to be taken out post retirement and the rest to be used to buy the annuity for an assured sum of rupees as pension per month.
New Pension Scheme (NPS)
The OASIS report was focused to provide financial security to the unorganised sector but informed the foundation of the New Pension Scheme and the NDA government, in December 2003, announced the scheme.
The scheme is common for all salaried and non-salaried persons across the country. Anyone can subscribe to this scheme. The difference is that in the OPS the government used to provide a fixed amount while in NPS, the market has a role to play as the amounts are invested. The amount investors get as annuity is less than what is given in OPS.
In this scheme, the employee has to contribute 10% of his salary while the employer makes an equal contribution.
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