Need of Pension Schemes in India

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NEED TO POPULARISE PENSION SCHEMES IN INDIA

By:
Dr. Ritu Bhattacharyya, Professor Marketing, Bharati Vidyapeeth’s Institute of Management Studies and Research Dr. Sangita Kohli, Lecturer, Somaiya College, Vidya Vihar, Mumbai

CONTEXT

India has the second largest population in the world. The working population of the world in India is also the second largest. The only old age security available in India is for people working in the Central or State Government enterprises or Public Sector. Once these sector were the biggest employers in the country, therefore covering a vast portion of the working population. This security scheme left out the people in the agricultural and the unorganized sector which was a very large population. With rapid development and industrialization and the privitasation drive a huge population today works in industries that provide no old age security in the form of pension. 78% of the working population today is employed in sectors that provide no pension. [1]

The current state of pensions in India is the result of individual plans developed and amended over several decades, rather than of a comprehensive and coherent approach to old age income security and social protection, based upon a guiding set of principles. This has resulted in gaps of coverage in several areas, and duplication within various programs in other areas. Similarly, income generated through existing programs is inadequate for many retirees, and often does not provide for protection against the risks of longevity and inflation. India is undergoing major demographic shifts, in which the elderly population will double from its 1991 level by 2016[2]. In comparison, it took most Western European countries nearly a hundred years to undergo the same transition, and they did so at a much high level of per capital income than India.

India does not have a comprehensive old age income security system. There are however, some mandatory schemes for employees of State and Central governments, employees of public sector banks, employees in firms with a staff of 20 or more and some others. In recent years, the insurance and the mutual fund industry in India has also started offering pension plans. In 2004, a new defined contribution individual account pension system was constituted for Central government employees recruited after January 1, 2004.

All too often, pension reform are seen by the Governments almost as an afterthought, or an adjunct to capital markets development. This approach fails to realize the considerable impact that pension programs typically have on economic development, social equity and poverty alleviation. Following are reasons why pension programs can have a substantial impact on economic and social development:

1. Use of scarce public funds: The Government of India currently spends almost 19% of its net tax revenues on pension programs[3], largely for civil servants who earn relatively large incomes and receive generous retirement benefits. While pension programs help to motivate and retain talented staff in the public sector, the high opportunity cost of this expenditure must be considered. scarce tax revenues can be used better to fund targeted poverty alleviation programs. A funded civil service pension program would reduce the government’s fiscal burden and free up tax revenues for other important initiatives. 2. Allocation of private-sector resources: EPFO (Employee Provident Fund Organisations) manages almost 400 billion Rupee in member contributions. Due to its strict investment guidelines, virtually all of these funds are placed in public-sector securities such as government bonds and debt financing for state-owned enterprises. While EPFO represents a significant source of funding for the Government, its investment patterns crowd out private investment. Contributions to EPFO are mandatory, and equal 10-12% of wages. This leave little to save in banks or invest in India’s capital...
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