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 NATIONAL PENSION SCHEME VS. OLD PENSION

SCHEME

Submitted by-

Divyaraj Jain

SM0121021

Faculty in charge –

Dhrubajit Gogoi

NATIONAL LAW UNIVERSITY AND JUDICIAL

ACADEMY

GUWAHATI, ASSAM

1|Page
TABLE OF CONTENTS

❖ ABSTRACT .............................................................................................................................. 3

❖ INTRODUCTION.................................................................................................................... 3

o LITERATURE REVIEW .......................................................................................... 4

o SCOPE AND OBJECTIVE ....................................................................................... 5

o RESEARCH QUESTION .......................................................................................... 5

o RESEARCH METHODOLOGY .............................................................................. 5

❖ WHAT IS THE OLD PENSION SCHEME? ........................................................................ 6

❖ WHAT IS THE NEW PENSION SCHEME? ....................................................................... 9

❖ WHAT ARE THE POLICY IMPLICATIONS OF SWITCHING BETWEEN THE

TWO?...................................................................................................................................... 11

❖ CONCLUSION ...................................................................................................................... 12

❖ REFERENCES ....................................................................................................................... 13

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ABSTRACT
The forthcoming state elections in India have brought to the fore a dangerous and economically
perilous policy of reviving the Old Pension Scheme. Many consider pensions to be just another
government employee benefit scheme, but the total burden it creates on government
expenditure is massive. Looking at the values of how much each state's revenue is being spent
on pensions, we realise the dark cost of this seemingly harmless public welfare scheme. The
Old Pension Scheme was scrapped and the National Pension Scheme was introduced by Atal
Bihari Vajpayee for this reason. However, political parties of the country have been making
disastrous promises to bring back the old pension scheme. Rajasthan and Chhattisgarh have
already reverted to the old pension scheme. This write-up aims to understand how the Old
Pension Scheme turned into such a disaster for the economy of India and its states. Along with
it, the author seeks to understand how the New Pension Scheme is different from its
predecessor and how it overcomes its drawbacks. The project analyses the actual condition of
these states and how much proportion of their revenues they spend on pensions. This project
argues that the old pension scheme takes up a significant proportion of state revenues into just
pension, generating no return on investment. Secondly, the Rs 3.86 lakh crores of pension
money is not coming from any pension fund that the pensioners have created; it just comes
directly from the tax funds of the existing taxpayers. With each passing year, as inflation rises,
the dearness allowance keeps increasing, and the government keeps allocating more and more
funds for pensions than for the actual development of the state itself. The state is obligated to
make these pension payments; however, they are not obligated to have a concrete plan as to
how to make these payments, and most of these states have no such plan. This write-up
concludes that the revival of the Old Pension Scheme is a disastrous policy that would cause
more harm than good to the Indian economy.

INTRODUCTION
As the state elections are getting closer and closer for many states political parties of India have
been making ridiculous promises that are very dangerous for the economy of our country. One
such policy is the revival of something called the ‘Old Pension Scheme’. Many consider
pension to be just another government employee benefit scheme but what many of us fail to
realise is the total burden that it creates on the government expenditure. If we look at the values
of how much each state’s revenue is being spent on pensions, we realise the dark cost of this
seemingly harmless public welfare scheme. The state of Uttar Pradesh spent 36.49% of its
revenue and Bihar spent 58.9 % while the state of Himachal Pradesh spent a staggering 79.93%

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of its own tax revenue into just paying pensions1. This means more and more is being paid as
pensions than for the actual development of the state itself. This is the reason why the old
pension scheme was scrapped and the national pension scheme was introduced by Atal Bihari
Vajpayee but even then, the political parties of the country have been making disastrous
promises to bring back the old pension scheme. In Rajasthan and Chhattisgarh, they have
already reverted back to the old pension scheme. In this project is an attempt to understand how
did the Old Pension scheme turn into such a disaster for the economy of India and its states.
Along with it we’ll try to understand how the New Pension scheme is different from its
predecessor and how it overcomes its drawbacks. The politics is on one side but can our states
really afford to go back to the Old pension scheme?

LITERATURE REVIEW
• Sanyal, A. & Gayithri, K. (2011). National Pension Scheme: For Whose Benefit?
Economic and Political Weekl , February, Vol. 46, No. 8.

The authors review various studies and reports on the NPS, including its structure,
regulatory framework, investment options, and performance. They analyze the NPS's
benefits, limitations, and challenges in providing retirement income security to individuals
in India. The authors find that the NPS has several advantages, including low cost,
portability, and flexibility in investment options. However, they note that the scheme faces
several challenges, such as low coverage, inadequate awareness among potential members,
and limited flexibility in withdrawal options. Overall, the article provides a comprehensive
review of the NPS and its potential as a social security mechanism in India. The authors
highlight the importance of addressing the scheme's limitations and challenges to ensure
that it serves the needs of individuals seeking retirement income security.

• Goswami, R. (2001). Indian pension system: Problems and prognosis. Indian Institute
of Management, Bangalore, January, 262001.

The author reviews various studies and reports on the Indian pension system, including its
structure, regulatory framework, coverage, and benefits. The review focuses on the
challenges faced by the Indian pension system in providing retirement income security to
individuals in the country. The author also discusses the implications of these challenges
on social security policy in India and recommends several measures to improve the

1
RBI Handbook of statistics on Indian States 2020-2021.

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 effectiveness of the pension system. These measures include expanding coverage,
enhancing benefits, increasing contributions, and improving regulatory oversight. The
author also highlights the need for a comprehensive social security system in India that
includes pensions, healthcare, and other benefits to ensure that individuals have adequate
income security in retirement. Overall, the article provides a comprehensive review of the
Indian pension system and its challenges. The author emphasizes the need for policy
reforms to address these challenges and improve the effectiveness of the pension system in
providing retirement income security to individuals in India.

SCOPE AND OBJECTIVE

The scope of the paper is limited to National Pension Scheme and Old Pension Scheme. The
objective of the paper is to understand the differences between the two policies and what are
the implications of switching between the two policies.

RESEARCH QUESTION
• What is the Old Pension Scheme?
• What is the New Pension Scheme?
• What are the policy implications of switching between the two?

RESEARCH METHODOLOGY
The paper is compiled using analytical research methodology. No primary sources were used.
Under secondary sources RBI Handbook of statistics on Indian States 2020-2021, various
statistical journals and articles by trusted publishing houses and news portals were referred to
attain the required information to the analysis made.

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WHAT IS THE OLD PENSION SCHEME?
Employees under the Old scheme receive a pension based on a pre-established formula that is
equal to 50% of the last wage received. Also, they benefit from the twice-yearly modification
of the Dearness Relief (DR). There was no salary deduction and the compensation is
predetermined. Let’s understand this through an example, let’s say Mr. Gehlot’s basic salary
at the time of retirement was Rs. 50000 so he would be assured of a pension of Rs. 25000 which
is 50 percent of his last drawn salary. On top of that, this monthly pay-out keeps on increasing
with something called the dearness allowance. This is calculated as a percentage of the basic
salary and it is meant to increase the income of these pensioners to make up for the inflation.
So, for example a 4% dearness allowance would mean that if Mr. Gehlot has a pension of Rs.
25000 he would see his monthly income rise to Rs25000 plus 4% of 25000 which is one
thousand, totalling the pension to Rs. 26000. This would be regardless of the market condition,
so the government would have to pay this amount to the pensioners even if the government is
in loads of debt or even when the economy of the country is going down. This is case of just
one person but as of 2021 there were 69 lakh pensioners in India and this system brings three
major disasters for the economy of our country. Firstly, when it is about paying mere Rs. 26000
to one person it is completely fine but if you just multiply this number by 10 lakh pensioners,
this pension pay out amount has increased to a staggering Rs 2500 crores per month and Rs
30000 crores per year. On top of that with the increasing number pensioners and dearness
allowance it keeps on increasing the liabilities on the balance sheet of both state and centre
balance sheets. If you look at the numbers in 1991 the centre’s pension bill was just Rs 3272
crores and the for all states, put together it was just Rs 3131 crores but by 2021 the centre’s bill
has jumped by 58 times to Rs 1.9 lakh crores while for the states it has shot up by an outrageous
125 times to Rs 3.86 lakh crores. Rajasthan alone spent Rs 23000 crores on pensions and Rs
69293 crores on salaries and wages which constitutes 56 percent of its own tax and non-tax
revenue, so practically just 10 lakh families constituting about six percent of the 1.6 crore
families take up 56 percent of the state’s revenues.2 This is the first problem with the old
pension scheme which is it takes up a majority of the state’s revenues into just pension which
in return generates no return on investment. Secondly, this Rs 3.86 lakh crores of pension
money is not coming from any pension fund that the pensioners have created instead it just
comes directly form the tax funds of the existing taxpayers. So, the normal taxpayers, who
already are very few in proportion to the total taxable population, who are paying the taxes are

2
Pandey, R. (2022).

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the ones paying for the pensions of the retired people in this country. So, with each passing
year as inflation rises the dearness allowance keeps on increasing and the government will keep
on allocating more and more funds for pension than for the actual development of the state
itself. The state are obligated to made these pension payments however they are not obligated
to have concrete plan as to how to make these payments and most of these states have no such
plan. Lets have a look at the actual condition of these states and how much proportion of their
revenues they spend on pensions. Refereeing to the chart below we can see that while states
like Gujarat, Maharashtra and Telangana paid only 15.33, 12.98 and 11.8 percent of their own
tax revenues on pensions. On the other hand, states like Bihar, Punjab, Assam, Himachal
Pradesh and Uttar Pradesh are spending 58.9, 34.24, 40.04, 79.93 and 36.4 percent of their own
tax revenues into just paying pensions.

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This is a very unfavourable condition for these states as if thirty to fifty percent of your revenue
is going into something that doesn’t give out any return on investment it creates a very terrible
economic position and secondly these states waste a ton of their money in pensions that they
do not have money to run the state and then become dependent on either on the centre or take
up more loans to run the government. Looking at the below chart published by the Reserve
Bank Of India, we can see that Punjab, Uttar Pradesh and Bihar are spending so much on
pensions and other things that the revenue from the centre itself accounts for 42.7, 52.1 and 75
percent of their revenue. So, if all the states start doing the same the central government will
go bankrupt and all these states will turn into mini-Sri Lankas of our nation.

However, a common man is not concerned or even aware about the financial condition of his
state but what concerns him is his pension. From a common man’s perspective old pension
scheme will sound very lucrative, firstly there is no deduction in his salary contributing to any
pension fund and he enjoys his whole salary. Secondly, he does not have to worry about market
volatility affecting his pension pay out, as in case of NPS, and is instead assured a certain
amount as pension which also includes dearness allowance. This is where the political parties
are able to manipulate them into supporting the decision to revert to OPS as these common
men are not able to 8oreseee the actual damage it will have on the state finances and inevitably

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on their personal lives. Yet due to the so called welfarism, state governments of Rajasthan,
Chhattisgarh and many more who have already switched or are intending to switch back to the
Old Pension Scheme. This was the reason why NDA government led by Vajpayee made a
switch to the New Pension Scheme.

WHAT IS THE NEW PENSION SCHEME?

During the early 2000s, the net present value of the pensioner’s promise to civil servant sand
pensioners added up to 60 percent of India’s GDP. So, it was clearly a humongous burden on
the economy of the country this is when the Vajpayee government came up with something
called the National Pension Scheme for the central employees and which was later adopted by
the many states. Let’s understand this also with an example, if Mr. Gehlot draws a salary of Rs
30000 in the beginning of his career 10 percent of this will be contributed to his pension fund
and even his employer which could be both government or private company would also
contribute another 10 percent and this money will get invested into the market though corporate
bonds, government bonds, equities etc. this fund management is done by pension fund
managers which can be sponsored by both government entities or private companies like SBI,
LIC, Axis, HDFC, ICICI, Kotak Mahindra, Aditya, Tata and Max etc. This makes it a
government monitored portfolio management service. As the salary of Mr. Gehlot increases so
will his pension fund and after his retirement at the retirement age of 60, the entire corpus of
funds that have accumulated and appreciated through investment will be used to give him
pensions month after month. He can also choose to withdraw 60 percent of this corpus after he
retires so if the corpus has Rs 2 crores worth of investment, Mr Gehlot can withdraw a total Rs
1.2 crores of this fund while the remaining 80 lakhs will stay invested in the markets to give
him regular pension. So, if the fund generates a 10 percent return Mr Gehlot will get Rs 8 lakhs
per annum as his pension and if he keeps two crores in the fund, he would then get a pension
of Rs 20 lakhs per annum. This scheme gives two major benefits to the economy of our country.
Firstly, in 2009 the scheme was made open for people other than government employees and
anyone could contribute to the fund so a lot of money from both government and private
employees is actually being invested into the Indian markets and from the market it is being
channelized towards government and private companies to do business and generate profit and
keep contributing to the overall economy. Secondly, the money that is acting as pension is not
coming directly and solely from the government but through the returns generated by the funds
in the market. So, this way the cost incurred by the government for pensions is expected to
decrease by a large extent and instead of fixed returns the return is based on the market

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conditions, so the government does not have to take the risk of giving out pensions even during
bad market conditions. The market has also given great returns, if we look at the return rates
of last five years for corporate, government and equities which are around 9 to 11 percent, 10
to 11 percent and 13 to 16 percent respectively. In fact, the returns on high-risk schemes have
been as high as 15 percent. Various different pension funds give employees options to choose
from different asset class or risk profiles according to his preferences. These are some major
benefits of this revolutionary new national pension policy. We have seen the benefits that are
provided to the government in the National Pension Scheme but let’s also have a look at the
benefits that it has for the pensioners.

1. Risk Assessment – Presently, the National Pension Scheme’s equity exposure is capped
between 75% and 50%. The ceiling for government workers is set at 50%. The equity
component will decrease by 2.5% annually in the range specified starting in the year
the investor turns 50. However, the maximum is set at 50% for investors 60 years of
age and older. As a result, the risk-return relationship is stabilised in the interest of
investors, protecting the corpus to some extent from the volatility of the equity market.
NPS has a larger earning potential than other fixed-income plans.
2. Tax Benefits – For NPS, both your contribution and the employer’s contribution are
eligible for a deduction of up to Rs. 1.5 lakh. The self-contribution, which is a
component of Section 80C, is covered by 80CCD(1). 10% of the salary is the maximum
deduction that can be made under section 80CCD(1), but not more. This cap is 20% of
the taxpayer’s gross income if they are self-employed. The employer’s NPS payment
is covered by Section 80CCD(2) and is not included in Section 80C. Those who are
self-employed taxpayers are not eligible for this benefit. The lowest of the following
will serve as the maximum amount allowable for deduction:
a. Employer’s actual NPS contribution
b. 10% of Basic + DA
c. Gross total Income.
Any excess self-contribution (up to Rs 50,000) may be claimed as an NPS tax benefit
under section 80CCD(1B). Hence, the programme permits a total tax deduction of up
to Rs 2 lakh.

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 3. Early Withdrawal/ Exit – You should keep investing until you are 60 years old as a
pension plan. Nonetheless, you may withdraw up to 25% for specific purposes if you
have been investing for at least three years. They include things like children’s
weddings, higher education, constructing or purchasing a home, or self- or family-
related medical care, among others. In the entire tenure, you are permitted to withdraw
money up to three times (each time with a five-year interval).3

Over the last 8 years National Pension Scheme has built a wide subscriber base with insanely
huge corpus of funds, as of October 31st 2022 the central government had 23,32,774 subscribers
and the states had a total of 58,99,162 subscribers while the corporate sector had 15,92,134
subscribers and even the unorganised sector had 25,45,717 subscribers. The total assets under
management of all the subscribers put together stood at a staggering Rs 7,94,870 crores as of
31st October 2022. This means more than Rs 7 lakh crores of capital is now flowing in the
Indian market to generate profits and wealth for pensioners while giving a injection of funds to
the whole economy.

WHAT ARE THE POLICY IMPLICATIONS OF SWITCHING BETWEEN THE

TWO?
If everything is going well with the new National Pension scheme why are all these political
parties trying to reverse it? This is because, there are about 6.9 million pensioners and Punjab
alone has 8.5 million government employees. So, in the next 30 years considering the entire
nations pension today which is Rs 3.8 lakh crores and adding the Rs 1.9 lakh crores, all of this
will be paid only to the retired employees of Punjab. The best part about the old pension from
the political standpoint is that although the upside of pension is quite simple to understand,
which is stable income, but the downside of the scheme, which is state finance, is too
complicated for the common people to understand. So, the politicians can actually promise all
they want and the common man will be completely blindsided about the long-term impact of
this move. So, at the end of the day, it is great to please people and get votes but it does not
seem to be good for the finance of the state. The worst part about this change when the
government brings back the old pension scheme, for the first few years the expense of the
government will actually go down. Therefore, the news headline and the media will say that

3
Rizwan, H. (2022).

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the expense of the government has decreased because of the reversal to the old pension scheme.
However, the catch over is that for the new national pension scheme both employee and the
company or the government have to make the contribution of 10 percent to the fund, so when
the old pension scheme is brought back the government will save on this 10 percent
contribution every year. Due to this on paper it will look like the state’s finances are improving
in fact even now the state finances are extremely stretched. This is because the retired people
in the old pension scheme are receiving their pension plus the government is making a
contribution for the new pension scheme workers. So, it will take another 10 to 20 years for all
the people in the old pension scheme to pass away. Then the new pensioners will receive their
income from the national pension fund scheme and that too form 2030. This is such a unique
policy that the repercussion of whether it being a good or bad decision will not be visible now
but 10 to 20 years later and again to reverse it, it will be another 20 years.

CONCLUSION
Pension is an integral part of any individual’s life; it ensures a financially stable life after the
retirement and it is sovereign responsibility of the government to ensure best pension policy
for its citizen. However, the problem arises when there is a confusion as to whether pension is
a just another freebee and a tool to gather vote or is it to ensure a stable income source for the
retirees while considering the feasibility of such pension policy. In this project we can
understand that the Old Pension Scheme is very lucrative and directly beneficial to the
pensioners in the short run but it overlooks the financial burden it creates on the state finances.
It is very evident and obvious that a policy which benefit only a few at a detrimental cost to the
majority of population is not viable. This problem was understood by the NDA government
led by Vajpayee and to create a balance between the pension and public finances it came up
with the National Pension Scheme. This scheme has inherently dealt with the short comings of
the Old Pension Scheme. The NPS overcomes the biggest shortcoming of OPS by creating a
pension fund which had contribution by both the employee and the employer, whereas earlier
there was no such fund and the whole burden was on the government. This fund ensures that
there is a pool of money from which the pensions can be given out whereas in case of OPS the
government is completely reliant on the revenues that it’ll generate. This fund also acts as a
major source of investment in the market, while providing fuel for the economy it gives back
returns which are added back in the fund. Therefore, it can be concluded that while the OPS is
completely reliant on payment of pensions by the government on the other hand NPS creates a
self-sufficient structure which ensures both creation of fund and also gives return on the same.

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It is important that state governments don’t make any hasty decision regarding these pension
schemes because they might make these changes today but their actual impact will be seen a
lot later and these politicians might not be even there to see the actual impact.

***

REFERENCES
• Goswami, R. (2001). Indian pension system: Problems and prognosis. Indian Institute
of Management, Bangalore, January, 262001.

• Pandey, R. (2022). Rajasthan’s pension system reversal is anti-reform, it will

reintroduce inequality. The Print, March.
• RBI Handbook of statistics on Indian States 2020-2021.

• Rizwan, H. (2022). All You Need To Know About National Pension Scheme. India
Time, September.
• Sanyal, A. & Gayithri, K. (2011). National Pension Scheme: For Whose Benefit?.
Economic and Political Weekly , February, Vol. 46, No. 8.

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