Monday, May 4, 2009

New Pension Scheme- Teething pains, but good one

There is a great opportunity to improve long term government finances by making it mandatory for all government employees to move out of the present pension system, which amounts to pick-pocketing by government employees from tax payers.

The New Pension Scheme is interesting. Some quick takes:

Contributions to the NPS from salary should become tax deductible;
The way it is structured, maturity benefits attract taxation; this will surely change to make it tax free;
The Pension Fund Managers are no great investment managers, with the usual suspects from the banking and finance industry;
Investment is only in debt and in the stock ‘indexes’. Why should this attract high fees?
Record keeping fees is ridiculous. In a mutual fund, the R&T fees come out of the permitted cap of charges that can be charged to the investor;
The government should also offer a ‘fixed return’ option like the PPF for risk averse investors. Let it be fixed at around 8 or 9 percent per annum for small investors, say for annual contributions up to a lakh of rupees. Even if the government has to subsidise part of it, it should not matter. This burden will be far less than what it gives to the farmers or sugar cane growers.

Net net, I think that it is a good thing. Over time, competition will bring down the costs.

The government should also ensure that each and every government employee (whether state or central or PSU or from the RBI or SBI or any other government employer) shifts to this NPS compulsorily. This is the only way that the future generations will be saved from the burden of mounting pension bills. Today, in a few state governments, the pension bill actually exceeds the current wage bill!! And this burden is borne by honest taxpayers like me.

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