Indian Pension Schemes: Problems & Prognosis

by Vinaya HS on September 8, 2017

in Finance

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The pension system in India has undergone a paradigm shift in the last few years. Numerous private companies have come up with attractive retirement plans to help individuals live a financially secure life post their retirement. Besides, the government has introduced schemes to help the common man avail of the benefits of a pension.

However, the pension system in the country is ridden with numerous issues. Most government retirement plans such as Public Provident Fund (PPF) provide manifold benefits for the organized working class.

One big problem is the disparity in the returns received. Public sector employees avail of numerous scheme benefits. Besides, public employees are also covered under the General Provident Fund (GPF), in addition to their pension benefits. The private sector employees, however, are not offered the same benefits and often receive low returns.

Structure of the pension system in India
Most countries around the world offer social security benefits to protect the elderly post their retirement. Social security plans provide individuals with a secure and comfortable retirement. Such a system, however, does not exist in India. Many government-centered plans in India work on employer and employee contribution. Again, this is beneficial to the organized sector, while employees of the unorganized sector do not receive any sort of economic support.

Most plans offered in India include gratuity, provident fund, and pension schemes. Gratuity and provident funds offer employees a lump sum amount post retirement, while pension plans offer annuity payments every month. Provident fund system works on a method wherein both employees and employers make an equal contribution of 10-12% of the monthly earnings. The accumulated corpus, along with interest earned, is then returned to the employee post retirement.

The government of India has also introduced numerous other schemes that facilitate this cause, namely National Old Age Pension (NOAP), and Atal Pension Yojana, besides others.

Problems and prognosis of the Indian pension system

There are numerous drawbacks of the Indian pension system, one of them being poor administration. Besides, the risk of investment and inflation are borne by individuals and not by the government. Another issue is the rising pension expenditure by the government due to lavish retirement benefits offered to public employees. Unless such a pension structure is adjusted, such government-sponsored pension schemes will soon become financially unsustainable.

The current pension system in India is governed and regulated by government agencies. Right from participation criteria, to investment guidelines, to benefit entitlement – the government decides it all. This often turns out to be a huge issue due to the lack of transparency and public accountability as well as the conservative regulatory environment.

From the aforementioned issues, it is quite evident that new mechanisms need to be implemented in order to rejuvenate the pension system in India. Encouragement of private participation, enhancement of system efficiency, relaxation of investment norms, and other policies could be enforced. This will certainly help in changing the current scenario for good.




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