Daily Current Affairs : 13-December-2023

The Reserve Bank of India (RBI) recently released a report titled “State Finances: A Study of Budgets of 2023-24,” expressing concerns about the potential return to the Old Pension Scheme (OPS) by some states. This move, while aiming to address pension issues, poses a significant threat to state finances, restricting capital expenditure and impeding economic growth.

Understanding the Old Pension Scheme (OPS):
  • The OPS provided government employees with a fixed pension, set at 50% of the last drawn basic pay.
  • It was considered a ‘Defined Benefit Scheme,’ assuring retirees of a predetermined benefit.
  • Monthly payouts increased with dearness allowance (DA) hikes, which compensated for the rising cost of living.
Concerns with the OPS:
  • Pension liabilities under OPS remained unfunded, lacking a specific corpus for continuous payouts.
  • The ‘pay-as-you-go’ system led to inter-generational equity issues, burdening the current generation with increasing pension responsibilities.
  • Unsustainability arose from the continuous growth in pension benefits and increased life expectancy, leading to extended payouts.
OPS vs. National Pension Scheme (NPS): Old Pension Scheme (OPS):
  • A pay-as-you-go scheme, OPS relied on current revenues to fund pension benefits.
  • Discontinued in many countries due to issues such as pension debt sustainability, an ageing population, and a burden on future generations.
National Pension Scheme (NPS):
  • A defined contribution pension scheme, NPS focuses on retirement planning during employment.
  • Mandatory for central government employees since January 1, 2004, NPS is adopted by most state governments.
  • Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS involves a 10% employee contribution and a 14% government contribution to employees’ NPS accounts.
  • As of December 2022, 59.78 lakh state government employees are part of NPS, managing assets worth Rs 4.27 lakh crore.
Important Points:
  • Understanding the Old Pension Scheme (OPS):
    • Fixed pension at 50% of the last drawn basic pay.
    • ‘Defined Benefit Scheme’ assures retirees of predetermined benefits.
    • Monthly payouts increase with dearness allowance (DA) hikes.
  • Concerns with the OPS:
    • Pension liabilities under OPS are unfunded, lacking a specific corpus for continuous payouts.
    • ‘Pay-as-you-go’ system leads to inter-generational equity issues, burdening the current generation with increasing pension responsibilities.
    • Unsustainability due to continuous growth in pension benefits and increased life expectancy, leading to extended payouts.
  • OPS vs. National Pension Scheme (NPS):
    • Old Pension Scheme (OPS):
      • Pay-as-you-go scheme relying on current revenues for pension benefits.
      • Discontinued in many countries due to pension debt sustainability, an ageing population, and burden on future generations.
    • National Pension Scheme (NPS):
      • Defined contribution pension scheme focusing on retirement planning during employment.
      • Mandatory for central government employees since January 1, 2004, adopted by most state governments.
      • Regulated by PFRDA, involving a 10% employee contribution and a 14% government contribution to employees’ NPS accounts.
      • As of December 2022, 59.78 lakh state government employees are part of NPS, managing assets worth Rs 4.27 lakh crore.
Why In News

The Reserve Bank of India (RBI) has issued a report titled “State Finances: A Study of Budgets of 2023-24,” expressing concern over the financial strain imposed by a return to the Old Pension Scheme (OPS) by some states. The report highlights that such a move would significantly burden state finances, limiting their capacity for capital expenditure and hindering efforts to drive economic growth.

Additionally, the RBI emphasizes the need for states to explore alternative fiscal measures to address pension-related challenges while maintaining fiscal sustainability.

MCQs about Old Pension Scheme’s Impact on State Finances

  1. What is the primary concern raised by the Reserve Bank of India (RBI) regarding the Old Pension Scheme (OPS)?
    A. Lack of defined benefits for retirees
    B. Potential strain on state finances
    C. Insufficient payouts for pensioners
    D. Excessive burden on the current generation
    Correct Answer: B. Potential strain on state finances
    Explanation: The RBI report expresses concern about the potential strain on state finances if some states return to the OPS, limiting capital expenditure and hindering economic growth.
  2. Why was the Old Pension Scheme (OPS) considered unsustainable?
    A. Lack of fixed benefits for retirees
    B. Insufficient contribution from the current generation
    C. Continuous growth in pension liabilities
    D. Inadequate focus on economic growth
    Correct Answer: C. Continuous growth in pension liabilities
    Explanation: The OPS was deemed unsustainable due to the continuous growth in pension benefits and increased life expectancy, leading to extended payouts.
  3. What distinguishes the National Pension Scheme (NPS) from the Old Pension Scheme (OPS)?
    A. Defined contribution nature
    B. Dependency on current revenues
    C. Lack of government regulation
    D. Pay-as-you-go system
    Correct Answer: A. Defined contribution nature
    Explanation: NPS is a defined contribution pension scheme, whereas OPS relies on current revenues and operates as a pay-as-you-go system.
  4. Why did many countries discontinue the Old Pension Scheme (OPS) before the 1990s?
    A. Inadequate benefits for pensioners
    B. Lack of government regulation
    C. Pension debt sustainability concerns
    D. Excessive contributions from the current generation
    Correct Answer: C. Pension debt sustainability concerns
    Explanation: Many countries discontinued OPS due to pension debt sustainability concerns, an ageing population, and the burden on future generations.

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