It's human nature to move from one extreme to the other. Societies and governments are no exception. This is evident from recent developments on pension and social security regimes in different countries. At one end of the spectrum, an individual is left to himself to plan, save and invest for his retirement needs. While, on the other extreme the government takes upon itself the responsibility of providing all the benefits including pension, medical facilities, disability benefits and unemployment allowance to citizens.

Two clear trends are emerging on the global pension stage. First, that governments are moving away from defined benefits to defined contribution schemes. Second, there is talk of increasing the retirement age to well above 60 years as government treasuries are not in a position to continue to fund retirement and social security schemes of aging populations.

Chile started its pension reforms in the wake of a mounting pension burden from its publicly managed defined benefit pay-as-you-go system. The new system is primarily based upon privately managed employee savings in individual accounts. The Chilean reforms have inspired other Latin American countries as well as some European nations to follow suit.

Throughout Europe, the social security system is under strain due to rising life expectancy and declining fertility rates that increase the numbers of the elderly. Some European governments, like Sweden and UK, have already instituted market-based defined contribution pension systems to reduce pressure on their public finances. India, clearly has an advantage today of not only learning from what's worked and also taking note of what has not worked well in the last few decades in various countries. Our demographic advantage of a large young population waiting to join the work force will diminish gradually over the next five decades or so. As is evident by various studies in the recent past, we will eventually reach a stage where we will have a large dependent population. Thus, it is imperative that we should develop pension and social security regimes which are robust, long lasting and sustainable.

Even though we have moved slowly in this process, nevertheless, recent developments show an encouraging trend. The government decided to move civil servants from defined benefits to defined contribution pension scheme. The next step in this direction was when it opened up the New Pension Scheme (NPS) for all everyone. It is pertinent to note that we do not have a comprehensive social security regime in the country. Some social schemes which were formulated in the post-Independence era like Employees' Provident Fund and Public Provident Fund have yielded results, but reach a very small percentage of our population. Thus, there is a wide gap to be bridged which will take some time. In this context, the NPS is a silver lining.

At present NPS is covered under an Exempt Exempt Tax (EET) regime. Under NPS, employee's contribution up to 10% of his salary and limited up to Rs 1 lakh, is eligible for tax deduction. Similarly, employer's contribution upto 10% of the employee's salary without any ceiling enjoys tax exempt status. The accruals in the NPS are tax exempt, while, the last leg of the whole transaction wherein the funds are withdrawn or wherein the pension is received from the annuity bought out of the accumulated funds under the NPS is subject to tax. It is proposed that NPS should eventually move to Exempt Exempt Exempt (EEE) regime under the Direct Taxes Code, which will make it attractive for people.

While lot needs to be done on this subject, some points merit attention at this stage. First, one of the big plus points of the NPS from the common man's perspective is the low cost of managing and investing funds. But this is turning out to be a disadvantage from the investment managers' perspective, because they find the transaction or annual charges to be so little that they are not inclined to market it in earnest. This is an area of concern and should be addressed at the earliest.

Second, it may be appropriate to give an option to employers and employees to opt for EPF or NPS. In a democratic system, this choice should be available to all. Third, the existing EPF regime may also be modified to serve its real purpose of old age income security. In addition to the facility for lump sum withdrawal, an option may be given to retirees to withdraw their accumulations in a phased manner, say over a period of 10 years after retirement, allowing the balance in the EPF to continue to earn tax free interest.

Fourth, the Employee's Pension Scheme which is part of the overall EPF scheme should be either discontinued in favour of NPS or it should be made more robust, as the present amount of pension distributed from this scheme is of little significance in the present day economic context.

Fifth, due to changes in the tax laws in the last few years, superannuation schemes have lost their charm. Therefore, employers and employees should be allowed to migrate their superannuation savings to NPS. Sixth, this year's Budget makes the employer's contribution tax exempt to the extent of 10% of the employee's salary, without any overall ceiling. Similar things may be considered in the context of the employee's contribution wherein deduction could be allowed upto 10% of the salary without any overall ceiling.

Thus, there is a need for a serious thought on developing a sustainable pension and social security regime in India to avoid future headlines that say, "The India growth story comes to a halt as it is not able to support its large dependent population".

Source : ET