E-Paper
Retirement: be serious, your government is
The NPS and the accompanying debate will provoke a lot of people to wonder if they are saving enough for old age, create awareness about the need for doing so and possibly change the way we have looked at our future needs.
The NPS and the accompanying debate will provoke a lot of people to wonder if they are saving enough for old age, create awareness about the need for doing so and possibly change the way we have looked at our future needs. Sixty per cent Indians haven't given their post-retirement plans a thought. But all that's about people like us.
For the government, estimated to have an implicit pension debt of Rs 1,735,527 crore, the NPS can only be a small step on the long pension reforms road. Expand the scope a bit and the NPS is projected to have the potential of generating a pension corpus of Rs 1 trillion within less than a decade of execution. Funds that would help build a stable debt market and provide a steady source of funds for the private sector that can be invested in infrastructure projects with long gestation periods.
But in so far as the government's bottom-line is concerned, the NPS will begin to bear fruit only after more than three decade, when today's recruits in the government retire without burning a hole in the exchequer.
Till then, the government will have to spend more rather than less to meet its liabilities. It will not only have to pay existing employees and pensioners but also make matching contribution for new employees. Though the demographic gift - that has the potential to push growth over the next two-three decades - will help reduce the impact of the burden, global experience suggests governments on the reform path also introduce parametric changes in existing schemes to reduce the burden over the short and medium term.
India is not likely to be any different. This is why it is reasonable to expect the government to introduce changes in existing post-retirement schemes. For one, it might convince the younger generation to switch to the NPS rather than hold on to the older schemes if they find the grass greener on the other side.
Uttar Pradesh has already notified that employees with less than 10 years of service can switch to NPS. In due course, expect quite a few states to join UP and build incentives into the system for at least some categories of employees to move to the NPS.
It could work in different ways, for different schemes.
A ban on pre-mature withdrawal from provident fund accounts could convince some of the non-mandatory EPFO members - those earning more than Rs 6,500 per month - to shift to the NPS, especially if private pension fund managers deliver better returns due to their diversified portfolio. Given that the EPFO has already scraped the bottom of the reserves barrel to give members a higher interest rate than it earned suggests this might have been the last year when PF members can expect a bonanza. The next time the trustees declare the interest rate, they will have to stick to what its investments actually earned.
Another way to reduce immediate pension liability could be to change the system used to calculate the pension. In the central government, the pension is calculated on the basis of the average salary earned during the last 10 months of service. But there are wide variations in the corresponding time period in the states, varying from a few months to nearly a year. States that have used a shorter duration like Orissa can expect the central government to nudge them to at least bringing it at par to cut immediate liabilities.
Many countries have also extended the retirement age to reduce their pension liabilities over the short and long term, a possibility that could be explored by state governments in the medium term.
Milestones on the road ahead We will all take saving for old age more seriously Government will introduce other changes in retirement schemes to manage liabilities Retirement age can be extend ed, especially by the states.
