The world has, painfully, realised it is time to retire the defined benefit pension introduced by Otto von Bismarck in 1889. The social security scheme worked well so long as more people were joining the labour pool than were leaving it. The precipitously greying West, in the last quarter of a century, finds too many pensioners living off too few workers. The defined contribution plan that is open to Indians now addresses the steadily mounting pension burden on future generations. By 2020, the average Indian will be 29 years old, with 30 years of work ahead of him. Enough to pay for his father’s pension, but he will leave a load heavier than he inherited on his son with population growth slowing. The pay-as-you-go pension plan does make eminent sense, even in a “young” India.
Every one of the 40 million contributors to provident funds now has the freedom to save more, and the freedom to choose where these savings are invested. Pension fund managers cater to a broad range of risk appetite, from treasury bonds to equity markets. The returns can be expected to be higher than the 8.5 per cent the Employees’ Provident Fund Organisation, caught in a thicket of red tape, offers its customers on the Rs 155,000 crore it has invested on their behalf. In comparison, the California Public Employees’ Retirement System (Calpers), the largest public pension fund in the US, had a composite return of 260 per cent in three years since it began investing $1 billion (Rs 5,000 crore) in Indian stocks in 2004.
The new pension plan could dip into a rich vein of Indian household savings that are invested in underproductive physical assets like land and gold. Pension reforms have for long been identified as a necessary condition for deepening our financial savings. As a pilot project — less than one in 10 of the country’s 422 million workers pays into a provident fund — the voluntary pension scheme can be enlarged into a wider social security net to cover medical and unemployment benefits. Our pension is secure, we owe it to our children that theirs is as well.
{{/usCountry}}The new pension plan could dip into a rich vein of Indian household savings that are invested in underproductive physical assets like land and gold. Pension reforms have for long been identified as a necessary condition for deepening our financial savings. As a pilot project — less than one in 10 of the country’s 422 million workers pays into a provident fund — the voluntary pension scheme can be enlarged into a wider social security net to cover medical and unemployment benefits. Our pension is secure, we owe it to our children that theirs is as well.
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