GS Paper 2
Syllabus: Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes
Direction: The article discusses that India needs a newly reformed pension system, instead an NPS vs OPS debate.
Context: Instead of discussing the issue of the old pension scheme (OPS) versus the new pension scheme (NPS), there is a need to revisit the idea of reforming the pension system in the country.
Need to reform the pension system:
- According to the World Economic Forum, people aged 65 and above outnumber children aged five or younger. Though India is at a low risk now, the country may face a longevity risk.
- Longevity risk points to a scenario where rising life expectancy could result in pension and insurance companies needing more cash.
India’s pension system standing in the global context:
- According to the Mercer CFA Institute Global Pension Index 2022, which tracks –
- Adequacy: What benefits are future retirees likely to receive?
- Sustainability: Can the existing systems continue to deliver, notwithstanding the demographic and financial challenges?
- Integrity: Are the private pension plans regulated in a manner that encourages long-term community confidence?
- India’s pension system is ranked 41 out of 44 countries.
Gross inadequacy of India’s pension architecture:
- At least 85% of current workers are not members of any pension scheme and are likely to remain uncovered or draw only social pension in their old age.
- Of all elderly, 57% receive no income support from public expenditure and 26% collect a social pension as part of poverty alleviation.
- The system for old age income support entailed 5% of public expenditure and state governments bear more than 60%.
- Contributory program funds invested in government securities corner 40% of all interest payments of state governments.
Comparing the Indian scenario with the WB pension framework:
- In 1994, the World Bank provided a 5-pillar (0, 1, 2,3, 4) framework:
- This framework is modified by the National Institute of Public Finance and Policy (NIPFP) – an autonomous research institute under the Ministry of Finance, to suit Indian circumstances.
- It is noteworthy that the OPS falls under Pillar 1 and the NPS falls under Pillar 2.
- Pillar 1, where the government-funded pension schemes to a small percentage of the elderly accounts for almost 62% of all public expenditure.
- Pillar 0, possibly the most essential one, gets just 4% of the total outgo.
What can be concluded from above?
- India’s pensions system is in a dire need of reform and doing so will be both good politics and good economics.
- Merely fluctuating between OPS and NPS is not a reform.
Conclusion: It is time for India to relook at its pension system and for the current debate to be broadened to look at pension requirements for the whole set of elderly.
Prelims Links: (UPSC 2021)