India Pension Systems Some Issues. Historical Framework Schemes are employer based –Government...
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Transcript of India Pension Systems Some Issues. Historical Framework Schemes are employer based –Government...
India Pension Systems
Some Issues
Historical Framework
• Schemes are employer based– Government pays DB Pensions
• 11 million members (Union & State)
– Most Private Companies & PSE’s part of EPF• 21.5 million members
– Some Private Sector have own Provident Fund• 4.6 million members in exempt schemes
• Labour force of 324 million
• Poorest 50% of population have -ve savings
• Low life expectancies rapidly extending
Form al pension-system coverage: India com paredw ith international pattern
y = -9E-10x 2 + 6E-05xR2 = 0.9096
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 5000 10000 15000 20000 25000 30000
Inc om e pe r c a pita 1 9 9 5 PPP$
Co
ntr
ibu
tors
/Wo
rkin
g a
ge
I ndia
N ote: Sam ple excludes transition socialist econom ies.Source: Palacios and Pallares (1999).
Fiscal Constraints
• Direct cost of Civil Servant Schemes
• Indirect cost of interest cost of funded schemes - 90% invested in government debt
• Only 11m tax payers - forced investment in GoI debt a form of tax
• Relics of state involvement in financial sector interest rates sticky downwards
Labour Market
• 20 Year vesting for Government Pensions
• GoI Pensions represent a significant portion of total compensation
• Private Employers frequently extend vesting beyond legal minimum
• No transferability between Provident Funds
Challenges
• High transaction costs of dealing with government schemes & poor record keeping
• Low cash cost of operating government schemes does not equate to good value
• Lack of confidence in employer managed schemes & delinquency in employer contributions to government plans.
• Regulatory vacuum
Cum ulative growth in Em ployees Provident Fund, equities, and m ixed portfolioversus incom e per capita, 1979–96
0
100
200
300
400
500
600
700
800
900
1000
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Index =100 in1979
Equities
EPF
1/3 stocks
Incom e per capita
Concluding Comments
• Changes to Mandatory Schemes will not affect the vast majority of the elderly
• Micro-insurance at the community level may be more effective to extend coverage
• India is in some ways ahead of the curve. Funded Defined Contribution Schemes are the trend of the future
• Financial market repression & poor governance weaken funded schemes