Atal Pension Yojana was launched with fanfare by our Prime Minister, Mr. Narendra Modi. This is supposed to be a great initiative for social security and nothing explains this better than one of the taglines associated with the scheme which says , “A landmark move by GoI towards pensioned society from pension less society”. The statement says it all. While the intent of the scheme may sound good, benefits given by the scheme do not sound convincing. While the scheme is meant to provide pension to those hitherto not covered by any pension, the real benefit of the Yojana does not appear worth it. The amount offered under the scheme is peanuts for a person effectively and also if the funds are self-managed by a person, he can get returns as good as what the scheme offers or better than that in many scenarios.
Let us evaluate the Yojana to understand the benefit offered by it. Here is a person earning Rs. 24,000 per month in a family of 5 and currently aged 40 decides to enroll him in this scheme. He wants a pension of 5,000 per year and takes pain to pay Rs. 1454 per month under the scheme. As shown in the chart below, to get a pension of Rs. 5,000 per month it is required that a person aged 40, contributes 1454 per month. Since this person is paying an income tax currently, all contribution for the scheme has to be made by him alone as there is condition stipulated in the scheme which says that for people covered under statutory social security scheme and those paying income tax are not eligible for government contribution.
The contribution of Rs. 1454 per month for twenty years means that the person ends up paying Rs. 348960 for entire period. Now imagine that the person does not pay this amount under the scheme and opts to invest himself. His monthly investment of Rs. 1454 would grow as follows:
|Rate of Return (Based on monthly deposits)||Amount on maturity (In Rs.)|
Let us look at another critical aspect. Suppose the person considered under the scheme survives twenty years after he turns 60, he needs Rs. 12 lakhs to get a pension of Rs.5,000 per month. This is calculated based as follows (5000*12*20). The aamount is something which can be easily generated by the person himself. Suppose the person ends up accumulating Rs. 865,435 by generating a post tax return of 8%, he can use this money for next twenty years to get the pension of Rs. 5,000 himself. Some people may ask how can a person get 8% return today. Today, there are bank deposit schemes available which offer a rate of return of 9% for 10 years. If a person is in lowest tax slab, for him the effective return is around 8.10% after decudting 10% tax rate.
Even without investing money he can get Rs. 5,000 for 11 years. With an investment which fetches him 5% return at the age of 60 till 80, he can easily manage a cash flow of Rs. 5,000 per month. So the scheme does not offer anything which is extra-ordinary. If the idea is to create society which is coveredd by pension, it is fine but not otherwise.
Now look at the second but equally important aspect of the scheme. What is the worth of Rs. 5,000 for a person who is aged 40 now after 20 years, when he turns 60 and starts getting pension? This can be shown with the assumed rate of inflation. The chart below explains this:
|Inflation Rate||Value of Rs. 5,000 after 20 years|
It is distinctly clear that the amount received after 20 years will be peanuts. While if and buts of the assumptions made above can be debated the fact remains that the scheme is not path breaking. It is also not burdensome for the exchequer. India, being a growing economy, asset classes such as equity is likely to do well for atleast next two decades. Equity investments can fetch potentially higher return than what has been mentioned above. In that case, it can become beneficial for the government to run a scheme like this.
People may ask that what about the cost of managing a fund. For a person managing funds himself this amount is very negligible and for government also the amount as a percentage of total amounts won’t be significant. There is a need to think again on Atal Pension Yojana.
By Vivek Sharma
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