Towards a secure retirement

A contribution rate as high as 24 per cent of the entire wage may also end up crowding out private savings. If increasing contributions implies that members have lower private savings, they may resort to withdrawing from their provident fund accounts to finance events in their working life. Early withdrawals are already a problem, and may get exacerbated as more money gets deposited with the new rule change. If most members withdraw from their retirement corpus for reasons that have very little to do with old age, the point of a provident fund system, and increase in contributions, is defeated.

The EPFO suffers from poor record-keeping and portability. In today's economy, members frequently change jobs, or move across locations, and frequently lose track of accounts opened at previous workplaces. Accounts need to be closed at older workplaces, and opened at new ones. Pouring down contributions into a system without centralised record-keeping and portability seems to not be the most efficient method of providing old-age income security.

Finally, the EPFO diverts 8.33 per cent of the contributions towards a defined-benefit scheme called the Employees Pension Scheme (EPS). Much has been written about the deficit of the EPS, and some part of the increased contributions will no doubt go towards bridging the funding gap. This will at best make the deficit go down temporarily, but does not solve the deeper design issues of the scheme, or make members any less vulnerable to the possibility of the EPFO reneging on its EPS obligations.

If the EPFO is keen on encouraging individuals to build a retirement corpus, then it should look towards the New Pension System (NPS) regulated by the Pension Fund Regulatory Development Authority (PFRDA). While the NPS also falls short of its initial design principles, it does slightly better in offering members choice of investments (though limited), larger equity exposure, and full portability of accounts. The EPFO could provide its members the option to invest their money in the funds offered by the NPS, thus serving as a point-of-presence, like the accounting departments of Central and state governments, that direct their employee contributions to the NPS.

... contd.

ALSO READ

Don't cry for cricket

Playing hardball with China

Sino-Pak Alliance: Naval and Nuclear Cooperation

The third way out