New Pension Scheme is a mirage, not an OASIS for retirement years

The Pension Fund Regulatory and Development Authority’s (PFRDA) announcement of a new pension scheme, for all the Indian citizens, effective from May 1, 2009, at once raised the hopes of people who have no wherewithal to support themselves during their evening years of life. But the devil in the detail dampens this exuberance with equal alacrity. 

It doesn’t need much of an elaboration here, as the media has already given an extensive coverage of the scheme details. The long and short of it is: one in the age group 18-55 should invest a minimum of Rs 6,000 per annum in installments - monthly, quarterly, half-yearly or annually - with any of the four fund managers. And the fund managers in turn invest the money in the shares and securities as per the choice exercised by the member choosing from three types of assets classes specified. The returns - the so called pension and refund - will depend on the gains and losses from such investments.

No tax relief is available on the lump sum maturity amount because the principal applied is EET (exempt exempt and tax) whereas the investments qualify relief under section 80 CCD up to specified limits.

Simply put, what one ultimately gets from the new pension scheme is: ones own savings plus earnings on the savings, minus tax on withdrawal and other expenses and penalties as detailed in the scheme.  Nothing extra comes out of thin air; there is no contribution from the government side.

The scheming
In fact, the very origin of the scheme, which was first implemented by the government to its own employees in a different form and now being extended to all the citizens, was with the objective to reduce its pension liability.

The government found that its burden had been increasing year after year leading to higher budget deficits; about Rs 65,000 crore was being paid every year by the central and state governments towards pension to their employees. The burden was seen increasing at the annual rate of 20%.

To reduce this burden the central government has introduced a new pension to its employees (which was accepted by the governments of most of the states subsequently) recruited after January 1, 2004 while those in service before that date continue to enjoy the old system of pension of pay-as-you-go type, which involved assured pension without any contribution from employee’s side.

The employees coming under the new pension scheme are required to contribute sums equal to 10% of their salary and dearness allowance and the government contributes matching sum. The same scheme, but, without the contribution from the government, is now being implemented to all the citizens of the country. This is the outcome of the pension reforms the government has been working out for over a decade.

Three reports, i) the Project OASIS (Old Age Social and Income Security) Report of December 1999, ii) the Insurance Regulatory and Development Authority Report on ‘Pensions Reforms in the Unorganised Sector’ (October 2001), and iii) the Report of the High Level Expert Group on New Pension System, also called the BK Bhattacharya report of February 2002, has made recommendations for these reforms.

Apparent reasons
While seeking to reduce its burden of pension to its employees, the government wanted to provide ‘relief’ to the others in the shape of this new pension scheme. The government feels that the people will suffer a lot during their old age in view of the impending demographic factors, without putting such scheme in place.

Although India is considered to be a young nation with average age of the people, of 26 years, there are 80 million people here who are above 60 years’ age, accounting for 12.5% of the world’s old people. Their number is estimated to be doubled to 160 million in another 20 years or so, because the increase of the old aged in India is at a higher pace of 3.8% than the population growth of 1.9%.

The problems of the elderly are bound to multiply as joint families break down. Add to this, the growing unemployment among the youth and the inadequate incomes would make it impossible for the young to take care of elderly dependents.

According to the OASIS-collected data, only 15% of the working population in 1991 were employed on a regular or salary basis; 53% were self-employed, while the remaining 32% were casual or contract workers. In the organised sector, 11.13 million were in government service who enjoyed non-contributory pension while the remaining 35.87 million were eligible for the benefits provided by the employees’ provident fund organisation. 

But these are 12-year-old figures and the situation has much worsened now with the increased unemployment in the country. The recent studies found that post-retirement dependence on children is 71% in rural areas and 59% in urban areas. Some 88% of the workforce has no pension benefit at all.

The real motives
These facts, no doubt, call for an urgent action to provide social security to the people during their old age. But the present scheme expects the people to fend for themselves. The real goal is not the welfare of the people. While one motive is for the government to distance itself from the responsibility of providing the social security to the people, the other concern is to allow the private interests to profiteer with the pension funds and hard earned savings of the society.

An expert group, appointed in October 2001, by the government estimated that the pension market (which includes pensions, provident funds and other small savings like NSCs) would reach a level of above Rs 4,064,00 crore by 2025. Similarly, the rate of savings in India is estimated to be equal to 35% of the GDP.

This situation has motivated the vested interests to eye on pension funds and to pressure the governments to allow private interest to take precedence over the social security of the people.

In fact, the central board of trustees of provident fund has categorically stated in 2000 itself that the OASIS report was “investment centric and not social security or social insurance centric and contains a number of recommendations and suggestions, which are inconsistent with the ground reality or practical considerations”.

True, it is ridiculous to expect people who have no sufficient income now to save for future. Also ludicrous are the contents like expecting them to make choices on the complex investment products of share and securities markets. In effect, the new scheme is a social security scheme only in its name.

The majority of the people can not make any use of the scheme. It is only a scheme to evade government responsibility from the arena of social security while allowing the private sector to handle, for their profits, the savings of the people to whatever extent they accrue.