Thursday, November 02, 2006

Pension and the Economy

India is now going through a process of Economic liberalisation. Along with reforms in many sectors, govt is looking at reforms in the existing pension system as well.

The system of pension in India is like Pay as you go - it means, the younger generation employees will contribute a part of their salary to govt which would ultimately be used to pay the pension of retired employees. This is a symbol of altruist state - as per the famous economist John Maynard Keynes.

The disadvantage of this system is it's dependence on population expansion. If the working population shrinks day by day, the old age people will soon become a burden to the govt. The issue gets complicated with debt-ridden govts goes for more borrowings to continue the pension system, that in turns adds no value to the economy.

There are four basic structural changes in the existing Pension system in India. First the employee should decide on where to invest his money and at what proportion. The pension will be maintained by some private sector company. The third is the money for pension will be invested into bonds as well. The final one is, Govt will control the expansion and regulation of the Pension fund.

Let us see how all these changes affects us in the long run. Hope it's not an end to the altruism from the Indian state towards it's citizens and ultimately, pension fund also gets a share of the economic boom the country is experiencing.

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