The Old Pension Scheme is a popular topic again in India, especially during election times. Many states are thinking about bringing it back because government employees like it. Some states like Chhattisgarh and Rajasthan have already started using the Old Pension Scheme, and political parties like Aam Aadmi Party and Congress are promising to launch it in other states such as Punjab and Gujarat.
Let’s look into what the Old Pension Scheme is, its benefits, risks, and how it compares to the New Pension Scheme.
Overview of the Old Pension Scheme
The Old Pension Scheme (OPS) was stopped by the National Democratic Alliance (NDA) government on 1 April 2004. Under OPS, government employees got half of their last salary as a monthly pension after retirement. This pension was updated based on inflation and salary commission changes. One important point is that employees did not have to contribute to this pension from their salary; the government paid the entire pension amount from its funds.
Employees also received gratuity payments up to ₹20 lakh when they retired. If an employee died after retirement, their family continued to get the pension. Additionally, the scheme covered adjustments for dearness allowance (DA), medical bill payments, and medical allowances after retirement. The Old Pension Scheme provided financial security to retired employees with guaranteed payments based on their final salary.
The OPS was replaced by the National Pension Scheme (NPS), which the Atal Bihari Vajpayee government introduced as a more long-term pension model.
Main Benefits of the Old Pension Scheme
- Employees receive half of their last salary as pension after retirement.
- If an employee passes away after retirement, their surviving family members continue to get the pension.
- There are no deductions from employees’ salaries to fund the pension.
- Retired employees get medical benefits such as medical allowance and bill reimbursement.
- A gratuity payment up to ₹20 lakh is given at retirement.
Risks and Challenges of the Old Pension Scheme
Economists from SBI say that the Old Pension Scheme might cause money problems for states in the coming years. States like Jharkhand, Rajasthan, and Chhattisgarh that have brought back the scheme face huge pension payments. For example, pension liabilities in Jharkhand are estimated at 217% of their revenue, in Rajasthan 190%, and in Chhattisgarh 207%. These large pension payments can increase debt and create financial risks for these states, making it hard for future governments.
How is the New Pension Scheme Different?
The New Pension Scheme (NPS) takes 10% from employees’ salaries for pension funds, unlike OPS where employees don’t contribute. NPS is a defined contribution plan where your money is mainly invested in the stock market. This means your pension depends on market returns and is not guaranteed.
OPS guaranteed half of your last salary as pension and included benefits like the Government Provident Fund (GPF), which NPS doesn’t offer. Also, with NPS, you have to pay tax on returns, and pension amounts can vary based on market performance.
To sum up, OPS offers more security and fixed benefits paid directly by the government, while NPS is market-based with investment risks but may offer higher returns.
Political parties keep promising to bring back the Old Pension Scheme to attract voters. Whether you support these efforts or prefer the New Pension System, knowing these options can help you plan your retirement better.
Keep yourself informed about pension schemes to make the best choice for your future financial security.