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Old Pension Scheme vs. New Pension Scheme

  • Context (IE): According to an RBI study, return to Old Pension Scheme by few states may adversely impact their finances.
  • The old pension scheme (OPS) and the new pension scheme (NPS) are both retirement savings plans.
  • They provide financial security to elderly citizens and help them meet their daily expenses.

Features of OPS and NPS

Features Old Pension Scheme New Pension Scheme
Introduction It was introduced in the 1950s. It was introduced in 2004.
Eligibility Only government employees who have completed at least ten years of service are eligible. It was started for government employees, but in 2009, GoI extended the scope to all citizens between 18-60 years (including NRIs).
Contributions This scheme does not require any employee contributions. Employees contribute 10% of their base pay, while their employers can contribute up to 14%.
Return Government employees are entitled to receive 50% of their last drawn basic salary plus a dearness allowance upon retirement. 60% lump sum after retirement and 40% invested in annuities.
Tax Benefits Income is not subject to taxation. 60% of the corpus on maturity is tax-free, while the remaining 40% is taxable when invested in annuities.
Flexibility It does not have much flexibility as it provides a fixed monthly income. The subscribers can choose their asset allocation, allowing them to generate higher returns and build a larger retirement corpus.
Return Certainty It provides return certainty, as it is based on the last wage received by the employee. It offers market-linked returns. Subscribers can benefit from market-linked returns without any guarantee of returns.

Disadvantages of the OPS

  • It places a massive pension burden on the Central and State governments, which could be as high as 4.5 times that of NPS and an additional 0.9% of GDP annually by 2060.
  • There is no established fund specifically designated for pensions, which could grow continuously and reduce the government’s liability for pension payments.
  • It is unsustainable since the pension liabilities would keep increasing every year.
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