Question

In: Economics

What happens to output per worker and the growth of output per worker in the long...

What happens to output per worker and the growth of output per worker in the long run if the current age pension system is shifting to the fully funded social security system.

The compulsory super contributions by employers for employees are now at 9.5% of wages.

Solutions

Expert Solution

While employees contribute 12 per cent of their basic salary and daily allowance (DA) per month to EPF, employers also make matching contributions. While the entire contribution of an employee goes to Provident Fund (PF), most of the employer’s contribution goes to Employees’ Pension Scheme (EPS) and Employees’ Deposit Linked Insurance (EDLI), while a small part of the contribution goes to PF.

So far, the entire amount of an employee’s contribution to a recognised EPF is eligible for tax deduction u/s 80C of the Income Tax Act even if the employee contributes more than 12 per cent of his/her basic salary + DA. On the other hand, employer’s matching contribution up to 12 per cent is tax free and any amount contributed by the employer in excess of 12 per cent becomes taxable.

Under a Superannuation Fund, only employers contribute 15 per cent of basic salary of respective employees to the fund. Contributions by employees are not mandatory, but an employee may make voluntary contribution and avail tax deductions u/s 80C on such contributions. Employers’ contributions up to Rs 1.5 lakh is tax free.

Originally launched to provide pension to government employees, who joined their services after December 31, 2003, employees contribute 10 per cent of basic salary and DA in NPS, while government contributes 14 per cent. Employee’s contribution up to Rs 1.5 lakh is eligible for tax deductions in a financial year, while the contributions made by government is tax free.


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