Today could well be a red letter day for the retirement wealth of salaried employees, if a politically loaded decision that seems inevitable goes through
NEW DELHI: Today could well be a red letter day for the retirement wealth of salaried employees, if a politically loaded decision that seems inevitable goes through.
The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) will hold a crucial meeting in New Delhi to decide, among other things, the interest rate on your mandatory contributions to the EPF for 2005-06.
The board is under pressure from the finance ministry to slash the interest rate from the prevailing 9.5 per cent, but employees’ representatives on the board and trade union leaders oppose it.
One of the main items on the agenda of today’s meeting is a consideration of the EPF interest rate for 2005-006. Additionally, the meeting will consider the actuarial report on the Employees Pension Scheme (EPS), which points to a huge ‘unfunded gap’.
A decision on whether the EPF interest rate will be cut - and if so, by how much - will hinge on political as much as on economic considerations. But it helps to understand the impact of even a nominal 0.5%age point cut on your retirement wealth.
Theoretically, every employee who is a member of the EPF will feel the pinch in various levels of intensity, but the impact will be felt most severely by those who are in the early stages of their career.
That’s because the effect of compounding of interest (which lets you grow your wealth faster) on your EPF contributions is typically felt over long tenures.
Consider the case of Sonalika Verma, a 28-year-old who earns a basic salary of Rs 6,000 a month; assume further that her basic salary will increase by a conservative 10 per cent a year over a 30-year career; that she makes no more than the statutory EPF contribution of 12 per cent of the basic; that her employer contributes a matching 12 per cent towards her retirement benefits, including the EPF and the EPS; and that unlike most EPF subscribers, Verma, a prudent retirement planner, makes no premature withdrawals from her Provident Fund account.
At 9.5 per cent interest calculated on monthly running balance in her EPF account, and compounded annually, Verma would have accumulated Rs 70.3 lakh over 30 years, and ensured herself a comfortable - even lavish -retirement.
At 9%, her kitty would shrink to Rs 66.1 lakh.
At 8.5%, her retirement wealth would shrink to a relatively more modest Rs 62.1 lakh.
In other words, a 1%age point cut would cut into Verma’s retirement funds by as much as Rs 8 lakh. And a 0.5%age point cut could see it shrink by over Rs 4 lakh. It’s a cut that will hurt for sure.
Trade union leaders are vociferously opposed to the proposal to cut EPF rates. D.L. Sachdev, national secretary of the CPI-affiliated All India Trade Union Congress (AITUC), told DNA that trade unions would oppose the recommended rate cut.
Instead, he said, they would pitch for a higher interest rate on the Special Deposit Scheme (into which a large portion of EPF money must mandatorily be parked, and from which the government borrows), which had systematically been lowered over the past few years to 8 per cent.
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