An opportunity to rethink India’s pension system

An opportunity to rethink India’s pension system

T.T. Sreekumar

Professor, The English and Foreign Languages University, Hyderabad

The HIndu Hyderabad 27.09.2024 

The pension system in India has undergone a significant transformation over the years with three major schemes, the Old Pension Scheme (OPS), New Pension Scheme (NPS), and the proposed Unified Pension Scheme (UPS), marking the different phases of government policy. Each scheme impacts retirees in different ways, with the OPS often being viewed as a more secure system compared to the NPS, which ties retirement funds to volatile market conditions. As the world witnesses a retreat from neoliberal policies, the debate around welfarism is being reignited. In this context, the UPS requires considerable rectification to ensure that it serves the interests of retirees effectively.

A shift with greater individual risk

The OPS, prevalent before 2004, guaranteed a defined benefit pension to government employees. In this scheme, the pension amount was fixed and determined by the last drawn salary, and the government was solely responsible for disbursing the pensions. The OPS provided stability and ensured that retirees were insulated from any financial market risks. The reliance on a fixed percentage of the last drawn salary for pensions meant that employees could plan their retirements with a sense of financial security, knowing that they would have a guaranteed income stream throughout their post-retirement years. The OPS reflected the government’s commitment to social security by excluding the market from the equation and offering guaranteed pensions.

In 2004, the Government of India replaced the OPS with the New Pension Scheme (NPS). Here, the shift was from a defined-benefit model to a defined-contribution model, wherein employee and the government contributed towards a pension fund, which was then invested in financial markets. The pension payout under the NPS is linked to the performance of these investments, meaning retirees’ incomes are now subject to the fluctuations of market forces.

The shift from OPS to NPS represents the neoliberal tendency to reduce state involvement in welfare provisions and transfer risk to individuals. The NPS left retirees vulnerable to market volatility, effectively placing their futures at the mercy of speculative market conditions. The NPS has drawn criticism because the security once provided by the state under OPS has been eroded. During periods of economic downturn, retirees may face reduced returns, undermining their financial stability.

This market-driven pension model has also fuelled wider concerns about the commercialisation of public welfare programmes and the weakening of the state’s social responsibility.

A return to welfarism

Globally, the era of neoliberalism that dominated economic policy for the past few decades is showing signs of a retreat. The 2008 financial crisis exposed the risks associated with excessive market reliance, leading to calls for stronger social safety nets and a return to welfarism. The COVID-19 pandemic further amplified these demands, as governments worldwide were compelled to intervene in unprecedented ways to protect the health and livelihoods of their citizens. India, too, is experiencing a similar shift, with demands for the return of state-backed welfare provisions.

The UPS, as proposed by the Narendra Modi government, emerges in this context as an attempt to provide universal pensions while balancing state involvement and market participation.

While the U-turn of the Modi government, as pointed out by the Opposition, aims to address the issues raised by the NPS, the UPS is still in its nascent stages and requires significant rectification before it can be seen as a viable alternative to the NPS. Critics have already pointed out that the UPS promises retirement payouts but offers reduced returns compared to the OPS and exposes retirees to the risks of uncertain market-based assets. The requirement of 25 years of service for a full pension is a disadvantage for those who join late, while potential underfunding raises concerns about future pension delays or corpus depletion.

Moreover, the scheme only covers Union government employees, excluding many public sector workers such as teachers, and may disincentivise further pay commissions. One of the critical aspects of the UPS that needs attention is the need for greater state intervention to ensure that retirees are not left vulnerable to market forces. While the UPS offers a universal framework, its structure should incorporate safeguards against market fluctuations, possibly by providing a minimum guaranteed pension similar to the OPS.

Issue of government contribution

Another area that needs reform is the level of government contribution. The UPS hybrid model would not completely mitigate risks associated with market reliance and may fail to offer a balanced pension system. Further, ensuring the inclusivity of the UPS across all sectors, including informal labour, is critical. India’s vast informal workforce currently lacks adequate pension coverage. The UPS must broaden its scope to provide pension security to all citizens, and not just to government employees, aligning with the broader return of welfarism that is gaining momentum globally.

The comparison of the OPS, the NPS and the UPS illustrates the tension between state-backed welfare and market-driven policies in India’s pension system. While the OPS provided a stable and predictable pension income, the NPS shifted retirees’ financial futures into the volatile realm of market investments, creating uncertainties and vulnerabilities. The retreat of neoliberalism and the return to welfarism worldwide, although on a limited scale or even notionally, provide an opportunity to rethink India’s pension system and strike a better balance between state responsibility and market participation. The UPS, if properly restructured, could become an important tool in protecting the financial security of retirees and addressing the shortcomings of the NPS, ensuring that India’s retirees are not left to the mercy of market forces but are supported by a robust welfare system.