Guaranteed pension is not bad economics

Context: Debate between old and new pension can be resolved with a new innovative product known as Contributory Guaranteed Pension Scheme.

Lifelong pension is not a good idea

  • Firstly, since the State has to bear full burden of pensions, it will become fiscally unsustainable in the medium to long run. 
  • Second, such an unsustainable rise in pension allocation would reduce the welfare expenditures allocated to the poor and marginalised sections.
  • Under Old Pension Scheme, therefore is a case of elite workers gaining at the cost of their brethren lower on the income ladder.
  • There is an inherent biasness between private sector employees and public sector employees. 

Solution lies in the Contributory Guaranteed Pension Scheme (CGPS)

Under this employees continue contributing 10% of their basic pay monthly as they do now under the NPS but the State promises to pay a pension of 50% of the last drawn salary which is adjusted for inflation, exactly as the OPS would have. The critical difference between the OPS and the CGPS is that a large part of the latter will be funded by the employees themselves as against no contribution in the former. And the State pays an additional balance of the difference between the 50% guaranteed pension and the market determined pension amount.

The upside is that if the market return happens to be higher than this, the State gets to pocket that. It may well be that on balance (with State gaining when returns are higher as against it paying the difference when they are lower), the additional burden on the CGPS (compared to the NPS) may be marginal.

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