https://www.financialexpress.com/opinion/nbspfoundation-for-a-robust-pensioned-society/3614987/
In India, around 150 million people are above the age of 60 and typically would have retired from their employment. Some could be working still as advisers, teachers, or consultants. But for all purposes, when one retires from employment, a regular flow of income stops. At the same time, life expectancy has increased greatly over the years. There are two major challenges for this section of society. The first is having an income which allows individuals to at least maintain the standard of living they had at the time of leaving service. The second is managing their health, as the probability of falling ill increases with age. It is true that healthcare systems have improved substantially to offer solutions, but the issue is having the wherewithal to bear the cost.
A social security network is relevant here to address issues of citizens. There is a need to have a regular flow of income post-retirement; and this is where pension funds have a critical role to play. The government has made it mandatory for companies to make certain deductions for pensions for employees, while the National Pension System (NPS) has been adopted by several organisations. In NPS, individuals contribute to the fund with the company contributing an equivalent amount. The corpus builds over time and upon retiring a person would be entitled to a combination of a lump-sum payment and a deferred pension payment.
This is important because the class of retirees is a fairly large section, which helps in generating consumption in the economy. And this number builds every year as people enter this age group. This will be subdued if there is dependence on younger family members or if their savings are not adequate. While working couples would find it easier to manage their expenses post-retirement, for a single working person the pension would be even more critical.
Secondly, pensions combined with health policies would be very important instruments for maintaining health over the years.
In this context, the various options open to individuals are quite exhaustive. At one end is the Old Pension Scheme which is applicable to several government employees. It provides an assured amount post-retirement based on a fixed formula. The recently announced Unified Pension Scheme (UPS) is another pragmatic measure which takes contributions from the person and assures a pension to not just the individual but also their spouse after the pensioner’s death. Between the two is the NPS, where individuals have a choice when investing in a fund. Here, money that is saved goes into equity or debt, depending on the risk appetite of the investor. A corpus is created, which is then distributed over time according to the terms decided at the time of joining the scheme. At the other end is the provident fund, which provides a corpus to the contributors but leaves it to the individual to decide what to do with the money upon retirement.
The pension contributions have a dual role to play. While the final corpus serves as the basis for pensions or reverse annuities to the contributors, the amount invested by the fund is also important. The investments made in debt could be government papers, which is where the conventional funds channel their resources.
Alternatively, it could be in corporate debt papers and other market instruments. This is important. Money invested in government papers helps fund the fiscal deficit, as the debt is partly subscribed by these funds. The money invested in corporate debt is normally channelled for investment. Either way, pension funds are investing in nation-building.
The NPS option of investing in equities has been another boost for the stock market, as the funds tend to invest in stocks of companies which are steady in terms of business and have been performing well over the years. Hence these investments are also helping in providing funds for higher growth in the country.
Given the demographic structure, where a larger working population is an advantage for India, it is necessary that this workforce actively invests in creating a pension fund at an early age. This will help in sustaining families at a later stage when they stop working. The government,along with the Pension Fund Regulatory and Development Authority, has provided the appropriate regulatory framework to provide various options to individuals so that they become self-sufficient at the time of retirement. As the working class invests in pension schemes, which is a fixed ratio of the income earned, the contributions tend to increase with the remuneration received. Hence, in a way, there is some automatic adjustment for inflation.
This is a social security network put in place by the government that is gaining a lot of traction. Creating a pensioned society would also enable the government to consider making changes to the labour laws, where the absence of such a social security network has held back reforms. Hence, having a strong pension system helps create a secure future, enhance savings, channel funds for nation-building, and acts as a precursor to more labour reforms.
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