It is no use talking about a pensioned society when dozens of cooperative banks fail, taking down innocent depositors' money; or thousands of chain-money schemes are looting thousands of crores of savers' money from every stratum of society, every year, says Debashis Basu.
Now that the ill-advised proposal to tax the Employee Provident Fund corpus on retirement and force people to buy annuities has been withdrawn, it is time to think coolly about what the best intentions of the government actually were, and whether those can be achieved by isolated changes.
It may be recalled that the finance minister had used the term "pensioned society", a peg on which he hung his killer tax-and-annuity proposal.
This term is not defined anywhere. It does not exist in BJP's 2014 election manifesto.
Interestingly, the manifesto does talk about creating "pension and health insurance safety nets for unorganised sector labourers."
The government attempted to fulfil the promise in its first year through two insurance schemes and the Atal Pension Yojana (APY). (I had said that APY, given its design, will not be a success. It has taken off very slowly and its problems will surface as time goes by. I had suggested an alternative in these columns, just months before the APY was launched, which would have taking out a leaf out of Life Insurance Corporation's design - but this was too radical, I guess.)
In trying to ensure a "pensioned society", I assume that the government wants the middle class to be able to retire safely and securely. (It appears that the real intention was to claw out more money as taxes from the "well-heeled middle class" but let's ignore that for the moment.)
Now, post-retirement security can only come from two steps: saving enough and investing it in the right products.
This sounds simple but it poses serious challenges for the average person for multiple reasons, which can broadly clubbed into two categories: the mistakes that savers make and the confusion that governments create.
The mistakes savers make
A retirement corpus is built over a long time, through careful saving and investing. But in the long journey towards retirement, savers are prone to making errors such as:
Saving too little
- Saving in products that yield too little, like traditional insurance products
- Losing money in chain-money schemes like Pearls or Saradha or the thousands of others that are proliferating
- Losing money in failed cooperative banks, which also run into the hundreds
- Losing money in market-linked products by entering without a clear understanding of the risks
- Losing money in a real estate project that has got stuck
- Investing too much in bank fixed deposits that don't beat actual inflation that affect urban middle class
Of course, savers must know what they are doing and are primarily to be blamed for not being careful with their money, but the context of our discussion is the government's objective of wanting to create a pensioned society.
It is no use talking about a pensioned society when dozens of cooperative banks fail, taking down innocent depositors' money; or thousands of chain-money schemes are looting thousands of crores of savers' money from every stratum of society, every year.
The standing committee of Parliament on finance has already submitted an excellent report on chain-money schemes which needs to be implemented while no steps have been taken to fix the poor supervision of cooperative banks. But that is the subject of another column.
The confusions governments create
Over the years, the government has allowed dozens of pre-retirement and post-retirement products each one carrying different incentives, features, taxability and regulation; it has also progressively added to the list, without much thought.
The Atal Bihari Vajpayee government had brought in the idea of National Pension System but it has been hamstrung from the start.
The Public Provident Scheme, which offers a guaranteed return, continues to run even after NPS has come in.
Low-yield pension products from insurance companies get sold easily. Why would anyone buy them?
Because insurance agents enjoy high incentives to persuade savers, unmatched by any other retirement product.
Many fall for the trap of yet another product from insurance companies, annuities, which offer extremely low and taxable returns.
Some also accumulate money for the long term in post offices and banks. Banks even sell a separate product called senior citizens savings' scheme (SCSS).
Many products such as insurance, PPF, NPS, SCSS offer tax savings at investment.
This mindless medley of products does not create choice. They create confusion.
They also make savers lean the wrong way, adding to the mistakes they themselves are prone to make.
That is why taxing EPF was not an isolated blunder. It was one in a long list of such blunders over the years.
If the government wants to create a "pensioned society", it must of course streamline these products.
But the very first step should be to establish the overarching principles and objectives of what we want to achieve.
From this will follow product designs, based on taxation at entry and exit, realistic assumptions of returns, incentives and behavioral biases of all actors - from regulators, to producers to sellers to savers.
Without first laying down these principles and objectives, we will lurch from one messy ad hoc measure to another.
The writer is the editor of www.moneylife.in.
