The plan is fostering a responsibility among workers to prepare for their own retirement
Anil I Lobo
Voluntary retirement plans can provide security and stability for older people who no longer have a steady paycheck—and India's National Pension System (NPS) aims to do just that. Like most of the world, India's population is aging, and lifespans are increasing. As a result of improved health and sanitation conditions, the global life expectancy is forecast to increase from an average of 65 years in 1990 to 77 years by 2050.
For most people, living longer means more non-working years to enjoy. But for growing numbers of people around the world, generating enough income to live comfortably during those non-working years is expected to be a challenge. Not only are many older people no longer earning income, but as the years advance, the cost of living and inflation continue to increase. As government leaders around the world consider ways to help citizens prepare for retirement, they can look to India's NPS as a model for boosting retirement savings and helping aging workers avoid poverty during old age.
India's National Pension System
In 2004, the Indian government launched its National Pension System with the goal of providing retirement income to its citizens. The system aims to institute pension reform and foster the habit of saving for retirement.
At first, the program was available for government workers, but in 2009, NPS became available on a voluntary basis for all Indian citizens between the ages of 18 and 60. Funds deposited in a Tier I NPS account cannot be withdrawn until the account owner reaches retirement age. The NPS offers some tax benefits for its participants: Contributions are made before taxes, but a portion of withdrawals are subject to taxes.
Since the launch of the system, the Indian government has created additional social security programs to encourage retirement saving, especially among the working poor. In 2010, the government's Swavalamban Scheme committed to depositing 1,000 rupees into the accounts of each saver who contributed 1,000 to 12,000 rupees into his/her own account annually and was not covered by a government or employer pension. But in 2015, that plan was scrapped in favour of the Atal Pension Yojana (APY), which guarantees defined pension distributions during retirement for savers who meet certain qualifications based on their contributions. APY also offered a government contribution of 50% of the saver's total contribution or 1,000 rupees per year, whichever is lower, for a period of five years (from 2015 to 2020).
India's NPS has gone through a few iterations and continues to evolve, but the plan is helping to boost retirement savings among Indian citizens. It's also shifting citizens' expectations: Instead of relying on younger family members to support them in their old age, many are now adjusting their savings and preparing to be independent in their retirement years.
Lessons from India's Model
For organizational leaders around the world, India's experiment in providing a national pension program for all its citizens offers a few valuable lessons.
Unsustainable National Debt Requires New Solutions
Long before the NPS was launched, India's federal and state government employees were covered by a tax-funded defined benefit pension program that provided a 50% replacement wage at retirement. In the mid-1980s, this program cost the country less than $0.5 billion annually, but by 2006, with people living longer, the price tag jumped to more than $600 billion per year.
Maintaining the program was unsustainable, and leaders realized they needed to develop a replacement program to ensure successful retirements for future workers and protect the nation's finances. Since the launch of NPS, all new government employees have been enrolled in it, fostering a responsibility among workers to prepare for their own retirement and protecting the government from running up unsustainable pension debt.
Tax Advantages Key for Retirement Plans
Most participants choose to invest in the NPS due to the tax benefits. However, some Indian citizens report that they opt out of participating in the NPS because they can get better tax benefits from private retirement savings vehicles. While this may be true for some individuals, many of the working poor don't have access to other retirement savings plans, and the tax advantages inherent in NPS are crucial for incentivizing them to save.
Educating investors on the Model's Benefits
While the NPS offers several benefits to savers, participation rates remain relatively low. Some respondents to a recent survey revealed that not understanding the importance of saving and compounding interest could have influenced their choice to opt out.
NPS leaders have used a variety of methods for communicating and educating the population about the system. For instance, pilot programs staged in two different geographic areas hosted workshops, meetings and camps targeting unorganized sector workers and key stakeholders. Information was also distributed through cable television networks, radio, mobile publicity vans, seminars and road shows.
India continues to measure the success of its pension program and may make more changes in the future. Many countries are struggling to solve the potential challenge of poverty in old age, but the NPS in India is an encouraging step toward protecting the future for many of its citizens, and it's worth looking at the model for inspiration.(The writer is India Business Leader – Retirement, Mercer)The Great Diwali Discount!
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