Retirees need to work till they drop dead

Salvation lies in low inflation and equitable tax concessions

S S Tarapore

The structure of interest rates in the Indian economy has undergone a sea change in recent years. The government and borrowers are ecstatic at interest rates reaching a 25-year low. But the real stakeholders, the savers, are in distress. India has no real social security worth the name and retirees spend a lifetime of painstaking conservation of resources for eventual retirement. In the recent period, retirees have been virtually sold down the river.

Retirees are considered as parasites, living off today’s productively employed population. Policy makers of today argue that the savers have nowhere to go and would submit meekly to any interest rate cruelty and therefore, it is quite safe to ruthlessly slash interest rates. Such impiteous views forget that each generation stands on the shoulders of those who came before it.

It is true that retirees are extremely risk averse and consequently settle for moderate rates of return. But in the recent period, risk averse savers have received corporeal punishment which is tearing the social fabric of retirees.

On retirement from the Reserve Bank of India in 1996 I had to handle what then appeared to be the princely sum of Rs 16.5 lakh. Here I am subsuming away from any other savings, pension or post-retirement remunerated work. Now my investment decisions in 1996 were as follows: Rs 5 lakh in Housing Development Finance Corporation (HDFC) monthly income deposit @ 15 per cent, Rs 5 lakh in Unit Trust of India’s (UTI) Monthly Income Plan (MIP) @ 15 per cent, Rs 2.5 lakh in corporate bonds @ 16.25 per cent and Rs 4 lakh in tax free Relief Bonds @ 10 per cent. This gave me a net of tax annual income of Rs 1,73,000 or Rs 14,400 per month which then appeared reasonably comfortable.

Now where do I stand in the year 2001? With the drastic changes in tax concessions biased against deposits and the passion for patriotic lower interest rates, even the most risk averse investors (like your columnist) restructured their investment portfolio. My restructured portfolio is now as follows: The Rs 5 lakh invested in UTI now yields 5 per cent (tax free) or Rs 25,000 per annum. The HDFC deposit was reinvested in other mutual funds yielding 7.5 per cent per annum (tax free) or Rs 37,500. The Rs 2.5 lakh in corporate bonds now yield 11 per cent or Rs 27,500 per annum (Rs 19,250 net of tax.) The Rs 4 lakh in tax free Relief Bonds now yield 8.5 per cent or Rs 34,000 per annum. Thus, the net of tax income now totals Rs 1,15,750 as against Rs 1,73,000 in 1996. Adjusted to 1996 prices the net of tax income is only Rs 87,500 or a drop of a little less than 50 per cent between 1996 and 2001. A continuation of these trends in the next few years would decimate risk averse retirees to virtual penury.

What will it take for retirees to claw back their loss of real income? I doubt there is anything that can restore their standard of living. At best, some recovery in nominal terms may possibly take place once the unidirectional downward drift in nominal interest rates stops and rates are northbound once again. But for nominal incomes of retirees to reach the 1996 level, one would have to unpatriotically hope for a crisis a la 1990-91. There is, however, no way that the retirees’ real income can reach the 1996 level. Rapid shuffling of the portfolio is not an easy option, thus the damage to retirees is irreversible.

The meaningful question is what can be done to alleviate the suffering of retirees. If one were cynical one would endorse the view that inflation is like sin — every government denounces it and every government practices is. But if one expects positive change, one would hope that the finance minister makes inflation control central to his overall economic policy and inflation control the single objective of monetary policy. Ideally, he should take a leaf out of the book of UK’s one-time Chancellor of the Exchequer, Kenneth Clarke, who said “I have given today’s politicians and tomorrow’s politicians no choice but to pursue the path of low inflation.” The retirees need nothing more if this were indeed implemented.

Another hope that retirees could have is that the finance minister undertakes a thorough review of the structure of tax concessions and that the policy of fiscal flagellation of investors in the government’s own instruments is stopped, putting in place a more equitable system of tax concessions. Thus, income should be treated as income and an umbrella tax concession could be provided for all financial instruments. This would be equitable for those with modest incomes. Under the extant tax system, individuals with incomes above Rs 50,000 are subject to tax while plutocrats with incomes of crores are free of tax because of the unconscionable policy of freeing from tax all dividend income in the hands of individuals. We must be joking if we call ourselves a civil society!

There is always a feeling among those in service and in decision-taking positions that the welfare of retirees is not really important as the articulate majority are those in service. But let us remember that the present interest rate and tax concession policies also affect those in service. Let us say that a certain average amount in a provident fund earns an interest rate of 12 per cent and alternatively a rate of 9.5 per cent. In 15 years the amount at the end of the period will be 5.5 times the original amount at 12 per cent, while it will be only 3.9 times at a rate of 9.5 per cent. So all you folks basking in the comfortable atmosphere of your work stations, be ready to crash your dream of the gentrified quiet sybaritic years of retirement. The present retirees are not the only losers! Those entering public service will now have to self-finance their pensions. What is worse is that that there are new fangled ideas of investing provident fund balances in the stock market. The plight of future retirees is even worse than that of the present retirees.

What should retirees do in the present dismal scenario? The sad thing is, precious little. I once argued that retirees need to work till they drop dead. With the worsening scenario, I am afraid that retirees would need to work even after they drop dead!