Towards a secure retirement

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SummaryIncreasing provident fund contributions within a faulty system is not the answer

Increasing provident fund contributions within a faulty system is not the answer

The Employees Provident Fund Organisation (EPFO) is moving towards increasing the mandatory contributions made towards an individualís provident fund (PF). Contributions to the PF are 24 per cent of basic wages. Earlier, employers would exclude allowances such as the housing allowance (HRA) to make the basic wage look smaller, and pay lower amounts. If the EPFO has its way, all sub-components of wages, except specific exclusions, will now be used to calculate the value of contributions, making the total greater.

In theory, this is a welcome step. Individuals are usually myopic about saving for old age, and mandatory contributions help build up a retirement corpus. In practice, even if there was complete clarity about which sub-components of the wage get excluded and which do not, there is one problem: the EPFO itself. Increasing contributions would not be as big a concern if the system worked well. Today, it does not.

First, there is the problem of choice. Not only is the EPFO locking 24 per cent of an individualís wage into a provident fund when a part of it could have been invested in instruments of her choice, but also not providing her with a choice of avenues within the provident fund set-up. The EPFO is required to invest its corpus into a set of specific instruments, mostly government securities and corporate bonds, and individual members have no say on where their own money should get invested. Larger contributions would only mean greater funds for the government, and not necessarily a greater corpus for members. Younger members of the EPFO may actually have the risk-appetite for equities, and may want to benefit from the upside till such time as they can. The EPFO could have been the avenue through which a large number of people are given the option to access the stock market, but it is not.

A contribution rate as high as 24 per cent of the entire wage may also end up crowding out private savings. If increasing contributions implies that members have lower private savings, they may resort to withdrawing from their provident fund accounts to finance events in their working life. Early withdrawals are already a problem, and may get exacerbated as more money gets deposited with the new rule change. If most members withdraw from their retirement corpus for reasons that have very little

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