Swavalamban
This is a social security scheme to popularize voluntary long-term retirement saving among low-income earners in the unorganised sector. These low-income earners in the unorganised sector do not usually realize the potential benefits of long-term retirement saving due to either low current income or financial illiteracy. To encourage the people from the unorganised sector to voluntarily save for their retirement, Central Government in its Budget Speech (FY 2010-11) introduced a scheme to contribute Rs.1,000 per year to each NPS account opened in the year 2010-11, where the unorganized income earner contributes an equivalent amount. This scheme was initially planned to run till 2013-14. "Swavalamban” is available for persons who join National Pension Scheme, with a minimum contribution of Rs.1,000 and a maximum contribution of Rs.12,000 per annum during the financial year 2010-11. In the Budget Speech (FY 2011-12) the scheme has been extended till 2016-17. The exit norms were also relaxed allowing exit at the age of 50 years instead of 60 years, or a minimum tenure of 20 years, whichever occurs later. In the first year of operation ( FY 2010-11) the number of beneficiaries reached 3,03,698.
There are at least five mutual advantages for Government and low-income earners in the unorganised sector, which supports future continuance of Swavalamban on fiscally prudent parameters. First, the government co-contribution is directly sent through electronic transfer eliminating leakages. This ensures a long-term retirement savings are invested in different assets with the potential of fetching adequate retirement income stream for low-income earners in the unorganised sector. Second, the more an eligible person saves , upto the maximum amount of Rs 12,000 specified per annum, the more he is entitled to get from the Government as a co-contribution and this is an in-built incentive will help him to save more. . An incentive of Rs. 1000 can prompt households to save 1x to 12x, theoretically. At present, an analysis of country-wise data shows that for every Rupee 1 allocated by the Government for this scheme, there has been a corresponding savings of 1.34. As more awareness of this scheme takes place, the savings of the eligible people are likely to be many times the amount put aside by Government. In other words, there is an in-built multiplier effect. Third, this pool of savings strengthens the options for funding long-term investment. This means this pool of long-term savings of a twenty year tenure could be used to finance long-term projects, infrastructure, for example. Fourth, at present Government spends a lot of budgetary funds on social welfare of the elderly. In due course, Swavalamban can reduce the requirement for such schemes as all savers under this scheme are less likely to need further social security. Not the least, in strict economic terms, this makes more better fiscal sense than lowering taxes since any increase in disposable income from tax cuts tends to go towards consumption rather than result in increased savings.
Similar to ‘Swavalamban’ there is a KiwiSaver scheme operational in New Zealand since 2007. This scheme however is mandatory to all those who are employed for a period of one month or more, with an optional exit possible during trial period 14days to 56 days.
Currently, all formal sector employees covered by the Employees Provident Fund Organization are also covered by the Employees’ Pension Scheme, 1995 under which the Government of India contributes 1.16% of their wages (subject to a monthly cap of Rs.6500) towards their pension. Therefore, ‘Swavalamban’ in National Pension System generates similar benefits to unorganised sector employees, and has potential for reducing poverty among older strata of population after the next twenty years or so, without causing undue stress on the budget.
Also See
References
- Budget Speech of Union Finance Minister, 2010-11, paragraph 90
- Budget Speech of Union Finance Minister, 2011-12, paragraph 106
- Report of the Committee to Review Implementation of Informal Sector Pension (CRIISP)
- http://www.kiwisaver.govt.nz/
