The concept of pension can be traced back to the era of American Revolution. In case the soldier outlived the war, the Continental Congress would recompense them by income for life. This practice was adopted in the Civil War & every war since. This however was not a novel phenomenon. Earlier in Ancient Rome the soldiers were also assured income post-retirement.
Here, by taking the examples of few of the countries & their respective pension systems we try to fathom the basic edifice on which the pension systems across the world function.
To start with, let’s take the example of France – The ‘pay as you go’ basis is the fundamental premise for France. The Pension expense tends to be entirely borne by the State, this takes some 14% of France’s national income.
The retirement age for pension is sixty two, two notch higher than the previously prevailing sixty. The retirement at an early age is available.
In China, The Corporate employees contribute 8% of their salary while the government employees contribute nil. Another peculiar way in which demographics affect the pension is the ageing population which by the year 2050 is expected to rise to the level of 331 million, an increase of 200 million.
Here we study the public pension system under the rural and urban systems. The rural system works more on a voluntary basis. The benefits in the rural are quite less when compared to the urban pension system. In 2003 the participation amounted to 9% of the total rural population.
Urban pension system was officially launched in the year 1997. The public pension system was based on pillars – Pillar 1A a pay-as-you-go portion & pillar 1B – comprises of the individual accounts.
The National Social Security Fund
Though NSSF is not part of the pension system. The public pension deficits are made good by way of the NSSF, it acts more like capital cushion. This started in 2000.
America’s public pension system also known as OASDI works on the pay-as-you-go basis. The funding of the OASDI is done through-
1. Social Security Taxes - Contributed by
employers & employees
2. Tax Revenues - Contributed by - Upper Income Social Security Beneficiaries
3. Interest earned on accumulated interest fund reserve
Of the private sector’s total population approx. 60% of the workforce has access to the retirement plans. DC schemes have predominance and cover some 40% of the workforce. Contrary to this only 20% of the private sector workforce participates in a DB (Direct Benefit) scheme. All in all 51% of the total workforce is unified into any pension plan. The occupational pension coverage is run by way of various schemes like 401(k) plan, 403(b) plan, 457 plans, Thrift savings plan, SIMPLE IRA, SEP IRA etc.
The South Africa pension system has the following characteristics-
1. Provident Fund Arrangements
2. Means Tested Public Benefit Program
3. Various Pensions
4. Non- Contributory
Public Pensions - The state pension system provides a time-honored monthly minimum income of ZAR 940. This is rewarded to men over the age of 65 & women over 60.
Occupational Pensions- Occupational retirement plans mainly work well with the ones employed in the formal sector. The move from DB to DC mainly took place in the decades of 1980s & 1990s.
The origin of the pension system in India can be traced back to pre-Independence era. The Indian Pension Act 1871 was replaced by the Pension System of 1857. For offsetting the inflationary highs the pension were duly enhanced. Despite of all this it was not universal as the old population as a whole was not under the protective economic cover. The years of 1881, 1919 & 1935 witnessed major amendments to the Pension System in India.
The schemes namely are – Gratuity, Provident Funds & Pension Plans. Here the pension plans gives benefit in the form of a monthly annuity. The other two namely Gratuity &
Provident Fund provide lump sum retirement benefit.
The Indian Pension Plans has certain characteristics like-
1. Guaranteed Maturity Benefit
2. Guaranteed Death Benefit
The Indian retirement system has certain characteristics like – embedded insurance cover, linked to earnings, compulsory, occupation based etc.
Pension Plans in India has broadly two parts- Accumulation & Distribution-
The Pension Plans in India are of two types-
1. Accumulation - Paying premium every year- (This is invested in the fund/asset of your choice
2. Distribution -
A) Vesting - You can ask to start your PENSION/ANNUITY
B) Vesting - Else withdraw the money
From 2004 onwards a new system – National Pension System – came into arena. This became effective from May 1 2009 having a wider coverage including the self-employed and the ones in the unorganized sector though on a voluntary basis.
NPS is a highly flexible system where the customer can pick the option most suited to them. NPS is a defined contribution based pension scheme launched by GoI, it has the following objectives-
- Extending old age social security cover to all the citizens.
- Facilitating source of income – Old age
- Equitable market based return over a long period of time
PFRDA allowed NPS to be accessed by one & all. NPS - Corporate Sector Model - was launched by PFRDA to include the employees of the corporate entities.
NPS serves to almost six million individual accounts. With the passing of the PFRDA Bill the PFRDA is equipped with the crucial statutory powers to regulate the institution of the NPS.
As per Economic Times - NPS subscriber base witnessed a growth of 35% in the F/Y 2016-17. The pension fund grew by 40% and this growth trajectory is expected in the fiscal year 2017-18 as well.
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