Making PF a farce

One of the oldest social security instruments in the country, the employees’ provident fund (EPF) has seen some very dramatic changes in recent times. Last week, the labour ministry authorised subscribers in to the EPF to dip into the reserves to pay for a house purchase (click here for more). The move has now been extended for even medical conditions that require monies to be shelled out.

According to this change, members in the EPFO can now withdraw funds from their EPF account for the treatment of illness and purchasing equipment to deal with the handicap without medical certificates. Basically, these moves have increased the liquidity aspect of the EPF, which will turn these long-term retirement savings to be used for short-term emergency funding.

The move is harmful and something that will leave scores of EPFO members with no money when they actually need it the most – when they retire. In the absence of any forced retirement savings, the chances of people voluntarily saving in the PF looks bleak. Moreover, members will use the available liquidity by dipping into their retirement savings to fund their present expenses. The move is uncalled for and not thought through, as it will open up avenues for members to look for ways to exit from the scheme than stay invested in it to maximise their potential retirement savings.

I think, retirement savings is a very important component in one’s financial life. The only way scores of Indians saved towards retirement was through the EPF. With this window converted into an emergency reserve, the government is facilitating a scenario where an entire generation of retirees may find themselves with no reserves to see them through in the last leg of their lives. The argument that future savings could be used to fund current needs is flawed, as this will encourage spending, which is good for a consumption driven economy, but is in no way suitable for those approaching retirement with little or no savings.

Unless there is a mechanics to enforce on forced retirement planning, there is no way anyone is going to consider saving towards this important financial goal. The tax benefit apart, there is no other draw to bring people into the EPF network. For smart investors and members in the EPF, there is a window of opportunity to claim tax benefit on contributions and use the savings to meet their medical and housing dreams. Perhaps, the government will be better off in fixing limits on how much one can withdraw from the PF, to check on a complete exodus from this big corpus money managed by the government.

nk@outlookindia.com