Shift focus from pensions to tax savings, says Paul Smith

  • With higher life expectancy, the way we looked at retirement at 60 years will also need to change, says Paul Smith
  • People should have tax advantage savings scheme that enable them to build financial cushion for their life. And health insurance should be built into it

Mumbai: Did you know that you may live beyond the age of 90 years? With higher life expectancy, the way we looked at retirement at 60 years will also need to change. The life expectancy at birth in 1969 was 47 years, which went up to 60 years in 1994 and 69 years in 2019 in India, according to a recent UN report. According to Paul Smith, president and chief executive officer, CFA Institute, in the West, children born today will have a life expectancy of 110 years. Longer lives mean you also need to have the financial capability to survive during old age. We spoke to Smith during his India visit to understand how prepared you are for your retirement. Edited excerpts:

In India, most of the population depends on their own savings for retirement. What can the government do to help to encourage retirement and pension plans?

We need to change the conversation from pension plan to tax advantage savings. The concept of retirement is becoming increasingly strange where people are living longer. When we think about retirement schemes, we assume that people will stop working when they turn 65 and will have savings that will last 10-15 years. That is increasingly unlikely to be the formulae in the future. People should have tax advantage savings scheme that enable them to build financial cushion for their life. The cushion should be flexible. And health insurance should be built into it, which is a much more important requirement as life expectancy extends from 70 to 90 years plus.

In the West, children born today will have a life expectancy of 110 years. A retirement scheme system built around you being able to leave work at 65 and live for another 45 years with your cumulative savings is not going to work. We need to start thinking a little bit more futuristic.

What are the challenges for government to provide a helping hand for citizens?

Tax advantage savings gets going in countries where the tax base is wide. The challenge in India is that the tax base is not wide. Pension savings or tax advantage savings are only going to help a very small section of society. From the government’s perspective, the first challenge is to broaden the tax base and increase income in the country.

Individuals also find it difficult to understand the concept of retirement. Most of them assume retirement will not happen to them. How can we change the mindset?

It is a global problem. People just don’t think about savings. Till the age of 40 years, many don’t think about what you are going to need at 70 years of age because it is too far away. People don’t focus on it. Enough resources, both intellectual and financial, are not put into thinking about how we can protect ourselves against some of the things that might go wrong. Here, the government can step in and nudge people in the right direction through mandatory savings schemes. Without that, I don’t think any amount of financial literacy or training is really going to help because the reality is that people understand the concept but are unable to match their actions to it.

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