The National Pension System (NPS) was initiated by the government in 2004 for government employees. However, in 2009, the scheme was opened to all citizens. The NPS is a voluntary, long-term retirement scheme, regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. This article provides detailed information about the National Pension Scheme (NPS) for individuals preparing for the civil services exam.
Recent Updates on National Pension Scheme
The PFRDA recently announced a significant change in the National Pension System (NPS). It stated that investors would no longer be required to convert 40% of their accumulated retirement corpus into an annuity. This decision was taken in light of the low yields on annuities and high inflation, which were resulting in negative returns. Furthermore, retirees can now withdraw the entire Rs.5 lakh savings in the NPS, a substantial increase from the previous limit of Rs. 2 lakh.
In March 2023, the Finance Minister announced the formation of a committee to suggest improvements to the National Pension System (NPS).
About the Committee:
- The committee will recommend changes to enhance the existing NPS for government employees, ensuring it caters to the aspirations and concerns of common citizens while maintaining fiscal prudence.
- The proposed changes will be designed such that they can be adopted by both Central and State Governments for their employees.
- Finance Secretary T.V. Somanathan will lead the committee.
Why is there a Need to Revisit the National Pension System?
- Five Opposition-ruled States, namely Rajasthan, Chhattisgarh, Punjab, Himachal Pradesh, and Jharkhand, have already switched back to the Old Pension Scheme (OPS). It is likely that more states will follow suit.
Understanding the Old Pension Scheme:
- The old pension scheme, a “pay as you go” scheme, was in operation until 2004.
- Critics argue that it generates intergenerational disparity.
- Under the old scheme, contributions from the current generation of workers were used to finance the pensions of current pensioners. This made it an unfunded pension scheme as it represented a direct transfer of resources from the current generation of taxpayers.
- The OPS provided a fixed benefit to retirees, set at 50% of the last drawn basic pay.
- Salaries and pensions increased along with hikes in dearness allowance, essentially to accommodate inflation.
- Although OPS is politically attractive, it is not fiscally sustainable as it is not contributory in nature, and the burden on the exchequer continues to rise.
- According to Soumya Kanti Ghosh, Chief Economic Adviser of the State Bank of India, the old system was fiscally ruinous and any return to the old scheme will not be fiscally viable. He pointed out that pension liabilities of state governments have seen a sharp increase in the long term. The compounded annual growth in pension liabilities is 34% for all state governments for the 12-year period ended 2021-22. As of 2020-21, 13.2% of revenue receipts were pension-related expenditure.
