Thursday, December 08, 2005

The EPF Rate Debate

Quick Background: EPF (Employee Provident Fund) is a savings/investment instrument for retirment for the salaried class in India (organized sector). Govt Runs the scheme and gives fixed intrest rate which is declared each year by EPF Board. in some sense similar to 401-K) For more in-depth details visit: http://www.epfindia.com/Index.htm
Guide to what EPF is?

Every year there is a controvery (soap opera) on what the rate of interest should be for the scheme. This year the EPF Board has recommended rate to be decreased to 8.5% from 9.5%. The returns EPF Board gets are 8.0%, so they are paying out more than they are earning. EPF is one of the major contributors for retirment amount for employed.

I want people to comment on what they think about the rates. Left in India is opposing the rate cut. It surely doesnt make any economic sense but does it make social sense?

There are several opinions expressed by various people:

http://dnaindia.com/report.asp?NewsID=9134

http://www.indianexpress.com/full_story.php?content_id=83560


I will comment later on my position. Lets discuss this - put your views as comments.

2 Comments:

At 9:27 AM, Blogger Sunil said...

a difficult question to answer.

A more relevant question would be "IS the EPF the best way for retiremet savings??"

Is it a flawed system that needs to be kept alive because so many people already depend on it?

 
At 7:35 PM, Anonymous V.Sridhar said...

At a very fundamental level any interest on capital is an unearned money -- a parasitical way of getting a share on the cake.

But none of the financial institution accepts this when they loan out money, while they'd be happy to accept this idea for the money they receive as deposits and its variants.

So our arguments cannot be based on the above, correct but unpractised, ideal.

Any reduction in interest rates upsets plans. For eg. when I joined service the interest rates were 12%. At that time I planned, with your deposits doubling in 5 to 6 years, I could take a voluntary retirement after the mandatory period of service and spend the rest of my life in educating rural children. My survival would be taken care of by the pension given and the interest earned out my contribution to the pension. But now my plans lay in taters. With inflated rates on pricing of commodities -- even the essential -- ones, I am not sure whether I can survive without a job and a concommitant usury through shares, real estate investments etc. And such methods of earning unearned money is necessarily a moneyed classes pastime -- just look around the the investment details of all the IT employers and employees to get a glimpse of what I say. They inflate the costs and the Govt servants ask for compensation while the vast majority are abandoned.

So the most meaningful question would be, Can the govt hold the price line on all essential commodities? If it cannot give the guarantee then debates on interest rates cannot be avoided while future govts would learn to ignore these demanding debates.

Regards,
Sridhar.V

 

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