Provident Fund
has always been a source of irritant to the policy makers and the critics. To
me, it is a question of too much thinking on a straight and simple topic. To
me, the Provident Fund is the cornerstone for my retirement. I do not want any
risks to be taken with it. While I understand the benefits of equity
investments, I do not wish my PF to be put in to this instrument. I do not want
my PF money to ever grace the bank account of any private sector company in
India. My PF gets invested for long term and nothing except the sovereign guarantee
will survive the tenure of a PF.
I am happy if
the government guarantees a rate of around eight percent (assuming we do not
see inflation cycles worse than what we have seen in the last thirty years). If
required, the government can say that if the inflation rate is below eight
percent per annum over a five year moving average, the interest rate would be
eight and should it go up, it would be adjusted to match the inflation rate,
for those years where the eight percent moving average is breached. And let the
benchmark for inflation be the Consumer Price Index.
Further, let the
PF be limited to salaries of up to Rs.20,000 or so per month. In case of higher
salaries, let the option be given to the individual to make a choice.
There is a
complicated method of investing this PF money by the EPFO. So many
intermediaries, so much of risk and at the end of the day, the return is around
eight to nine percent. Why have all this complex arrangements and heightened
risk?
Let all the
money go to the government. In any case the government is raising debt by
issuing paper. Let the PF moneys get a guaranteed eight or nine percent. The government
may, at worse be paying an extra percent or two over the long term. Today, the
EPFO has nearly 42 million accounts. Let me assume, generously assume that the
average PF per account (12% of 15,000 from employer and employee each, per
month- or around Rs.3,600 per month, including employer contribution) is an
annual Rs.43 thousand. So for 42 million accounts, the annual accretion would
be of the order of under Rs.200,000 crore each year! Today, the PF amounts
cited include the PF on the higher salaries too, without the ceiling cut off.
Let the ceiling be in place- After all, the government is obliged only to
provide a base level and not guarantee the savings of the rich and famous through
subsidies. At under Rs.2 lakh crore
today, even if this increases by five to six percent each year, the damage on
the exchequer is not large.
On 2 lakh cr,
the differential would be around Rs.4,000 crore for the year. Let us assume an
accumulated corpus of 20 years. In which case it would be around Rs.20 lakh
crores or so, with compounded interest. On this amount, annual subsidy at two
percent would beRs.40,000 crore! And we can do away with all the management
costs that are now being incurred in the management of the corpus. And this
subsidy is well worth the social benefits that accrue. This 40,000 cr number
assumes that the Govt can raise perpetual money at six percent. If we think
eight percent is fair, then the question of subsidy does not arise at all.
So, instead of
debating where to put the PF money etc, let the entire thing go to the govt,
interest be funded each year by the govt and do away with private trusts or
management of PF moneys.
( I hope my
basic numbers are right. If anything, I have perhaps erred on the higher side,
I think)
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