Question
Q2(a). Discuss about the New Pension Scheme drawing comparison with the Old Pension Scheme.
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“A sound pension system is the foundation of social security in an ageing society.” World Bank
India introduced the New Pension System (NPS) in 2004 to ensure sustainable retirement benefits for government employees and to reduce the fiscal burden caused by the Old Pension Scheme (OPS). The NPS marks a paradigm shift from defined benefit to defined contribution.
Old Pension Scheme (OPS):
- Based on the Defined Benefit model government guaranteed 50% of the last drawn salary as pension.
- Entirely non-contributory for employees; financed by the state exchequer.
- Covered only government employees, leading to significant long-term fiscal pressure.
- Pension revision linked to Pay Commission recommendations, ensuring inflation indexation through DA.
New Pension Scheme (NPS):
- Introduced for all central government employees (except armed forces) joining on or after 1 January 2004; extended to private sector and unorganized sector.
- Operates on a Defined Contribution basis employees contribute 10% of salary, and government contributes 14%.
- Managed by PFRDA (Pension Fund Regulatory and Development Authority) under a market-linked structure.
- Offers Tier-I (mandatory) and Tier-II (voluntary) accounts with tax benefits under Section 80CCD.
- Ensures portability, transparency, and partial withdrawal options for emergencies.
Key Differences:
| Aspect | Old Pension Scheme | New Pension Scheme |
|---|---|---|
| Model | Defined Benefit | Defined Contribution |
| Funding | Fully Government-funded | Shared Contribution (Employee and Govt) |
| Fiscal Impact | Heavy and Unsustainable | Reduced Long-term Burden |
| Market Link | None | Market-based Returns |
| Portability | Limited | High (PAN/PRAN-based) |
Haryana adopted the NPS for its employees in 2006. In 2023, the state introduced a Family Pension Protection Scheme, ensuring a minimum post-retirement income guarantee alongside NPS. Employee unions in Haryana, as in other states (Rajasthan, Chhattisgarh, Punjab), have demanded OPS revival, citing income security concerns.
The NPS represents a sustainable, technology-driven, and inclusive pension framework aligned with India’s demographic transition. However, balancing fiscal prudence with social security remains essential requiring hybrid reforms like guaranteed minimum returns or micro-pension schemes for broader protection.