Pension To Every Individual Without Contribution

Nearly every country has various pension schemes for old age/after retirement life. There are various forms of pension schemes: for employees, for organized sectors, for unorganized sectors, for every citizen having mandatory & non-mandatory contribution and voluntary & compulsory participation.

These pension schemes are part of the government’s social welfare schemes. In some countries, Pension expenditure and social expenditure form considerable part of government’s total expenditure and % of GDP.

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Above tables 13.1 & 13.2 shows how pension and social spending form a significant part % of the GDP of major OECD countries.

In developing countries, for example in China pension spending is around 5% of GDP and in India; it’s around 2-3%. In developing countries, pension spending is quite low compared to developed countries.

The Pension system is important, as it provides security after retirement/ in old age when our body doesn’t allow us to work biologically. But present pension system has many problems/issues: are mentioned below:

1. Present Pension Model is either a contributory one (voluntary or non-voluntary) where individuals/employers contribute for their/employees retirement life or the one where governments support older people through various schemes. First way is not a universal one and the second way puts a fiscal burden on the government. The Biggest problem of this system is that it is not universal in nature.

2. In the present pension system: there are three participants (can be one or two or all three: vary from country to country and pension schemes).

3. Three participants: Consumer (employee), Entrepreneur (employer) and Government. Contribution from participants depends upon pension schemes. In some schemes, all three participants, in some first two, in some first and third and in some schemes only the third one that is government, take the whole burden.

4. When an employee (a consumer) contributes (nearly 10% of salary in some pension schemes): it reduces the present spending of that consumer. So reduces the aggregate demand.

5. When an employer (an entrepreneur) contributes: it reduces his profit margins. So decreases the capital investment.

6. When the government contributes: it increases the burden (fiscal pressure) on the government. For the contribution, governments have to increase the revenue (taxes/borrowing/fiscal deficit etc.). It increases the welfare schemes of the government. So increases government intervention in free markets.

7. Contributed money goes in the pension funds. These pension funds invest the contributed money acc. To the pension schemes: in fixed deposits, in bonds, in debt market, in capital market, Stocks, venture funds etc. These funds appoint a team of experts for the management of funds. In some countries, these pension funds have huge money under their management that they have become the dominant investment player in the markets.

8. Though Investment from pension funds helps the economic unit, it lacks self-interest, True spirit of investment/ to seek profits which the entrepreneurs represent.

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So in the present financial model, present pension system

Reduces the private consumption: that means reduces the aggregate demand.

Reduces the profit margins of entrepreneurs: that means reduces the capital investment.

Increases the burden on government: means fiscal pressure. Governments have to increase the revenue (taxes/borrowing/fiscal deficit etc.)

Whatever demand created/investment done by pension funds does not represent the true of spirit and lacks the self interest.

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Looking at the above points, present pension system is not good for any participant (consumer, entrepreneur and government). So we must abandon this pension system and find a more productive one which should solve the above problems and represent forces of free market economy.

New financial model proposes to abandon this inefficient pension system and introduce a more productive one which will represent the forces of a free market economy.

“Concept of Future Money” on which “New Universal Pension System” Based

(From Chapter 6th: New Financial Model)

New Financial Model introduces Concept of Future Money. Future money is basically a monetary incentive on the consumption to encourage consumption in short run. Presently, entrepreneurs/distributors use a number of strategies (discounts, advertisements, festival sales, other schemes & programs) to encourage consumption of their products in the short run. FM money will become another option to encourage consumption in the short run and will provide a number of benefits to all the components of the economic unit.

This model will benefit the economy from both sides: by encouraging consumption on one side and building long-term financial savings that can become available for investment on the other. Through the concept of Future Money, the model seeks to increase consumption in the short run while simultaneously building long-term savings that can support investment.

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Important things for the economic unit implementing the concept:

1. Every consumer like you and me will have a unique Consumer identification number (or other centralized numbers from government authority).
2. Every consumer will have a future money account (FM Account) maintained by an authorized financial institution or other entity designated under the applicable regulatory framework.
3. The relevant authorities will establish a Future Money Council in the economic unit.
4. There will be a Future Money Council in the economic unit made by the authorities and this FM Council will decide the future money rate (FM rate) and number of years (n)
5. Value of Future money, FM rate, Number of years can be zero to maximum depending upon various things (Range decided by FM council, market forces, economic situation etc.)

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How it will work: Consumers will get a monetary incentive on buying the eligible final goods/services. When a consumer having a unique consumer number will purchase eligible final goods/services, future money (monetary incentive) will be deposited in his FM account automatically.

The Amount of Future Money will depend upon the FM rate f (% of final goods/services price), minimum-maximum limit/range of which will be decided by the FM council.

For example: Suppose you go to buy a thing. Say the price of that good is $100 and $5 is future money (5% is FM rate). When you buy that thing, you will get the $5 as future money in your future money account.

Important thing in this concept is that this future money will not be available to consumers immediately, but after the retirement or N number of years or time decided by the FM council, market forces as proposed by this model.

Who will deposit the Future money?

Future Money may be deposited into a consumer’s Future Money account by sellers, entrepreneurs, distributors, governments, consumers themselves, or through a shared contribution mechanism among these participants. It is up to seller/entrepreneur/government/consumers to give incentives or not (if no minimum limit is set by regulating authorities). An important question is whether funding Future Money will impose an excessive financial burden on the contributing participants, particularly sellers and entrepreneurs.

However, contributors are not required to deposit the full face value of Future Money immediately. Only its present value must be deposited into the consumer’s FM account, where it will grow at the prevailing interest rate over the maturity period to reach the Future Money amount. The financial implications for each participant will therefore depend on the funding structure, FM rate, prevailing interest rate, and maturity period.

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Let’s see example.1 again. Final Goods Price (C): $100, FM rate (f): 5%, N (number of years): 30 years. Future Money (FM) will be = $5

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Now this $5 will be available after 30 years, not today. Amount which entrepreneurs/Sellers/Governments/Consumers will deposit in the consumer’s FM account will depend upon N (number of years) and prevailing interest rates. See the amount need to be deposited in the FM account from the below table:

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Important Points from the above table

1. Entrepreneurs/Governments/Consumers do not have to deposit the entire amount of Future Money immediately. Instead, they have to deposit the present value of Future Money in the consumer’s FM account. The present value of Future Money depends on the prevailing interest rate and the number of years until maturity and is calculated using the following formula:

Future Money (FM) = Present Value of FM * (1 + r) ^ N

Present Value of FM = FM / (1 + r) ^ N

Where Future Money = Final Price of Goods (C) * FM Rate (f)

So, Present Value of FM = C * f / (1 + r) ^ N ----- [Equation (1)]

2. Future Money will not be available to consumers immediately but after the number of years. The table also shows that, holding other variables constant, an increase in either the interest rate or the number of years reduces the present amount required to fund a given Future Money claim.

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New Universal Pension System

As we have read, the “New financial model” introduces the concept of Future Money and the new financial tool FM rate. Future Money is an incentive that consumer receives on consumption and is given by the entrepreneurs /governments/others to increase the consumption. (voluntarily) (Read the New Financial Model Paper – 2 Chapter 6. for detail)

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A. This Future Money will not be available to consumers immediately but after N no. of years.

B. You can see that in the examples: we have taken N = 30.

C. FM council/Market Forces can decide the value of N: it can be any value, can be less than 30 or more.

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Every individual is a consumer and Over the number of years of consumption: Every consumer will build a significant amount of Future Money or we can say FM corpus.

New Financial model proposes to use this Future money corpus as a pension corpus for the consumer. It must be available to the consumer in old age/after retirement. Authorities can set the rules of its redemption: through an annuity, monthly payments, portion of withdrawal in certain cases or premature withdrawal in emergency times (like economic recessions/depression/low growth period/in Covid-19 type times etc. to increase the aggregate demand in the short run).

To build the FM corpus for every individual’s pension, the government can set the rules for minimum FM contribution (a small %: say 1%) from all three participants (consumer, seller, and government) on the consumption of final goods. For example, Governments can decide to contribute a small % of consumption tax collected from every individual (indirect taxes collected on the consumption of final goods) in the FM account of consumer upon the consumption of final goods by that consumer, to build the corpus for the pension.

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Following are the benefits of the New Pension System:

1. Universal Participation around the Globe: Every individual is a consumer whether he/she is an employee or not, in the public or private sector, in the organized or unorganized sector etc. So every individual will consume: build the FM corpus for him. From this FM corpus, he will be able to get a pension in old age. So participation in the New pension system will be universal in the economic units which are going to implement new financial model.

2. More Consumption: No employee, no individual (consumer) will have to contribute to the pension schemes. So all the income will be available for consumption.

3.More investment: No entrepreneur will have to contribute. So more profit margins, more money available, and more capital investment.

4.No burden on Government: No contribution/No burden on the government. No need to raise more resources through taxes/borrowing, don’t run fiscal deficits. Government just has to play the role of an efficient regulator in implementing the new pension system and new financial model.

5.Welfare of People: As pensions will be available to each consumer, it will create a welfare state.

6.Free Markets: More consumption and investment through free market forces. Etc.

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This is how the “New Financial Model” will establish a new pension system: which will be more productive and good for every participant & for the whole economic unit.

This Chapter is a part of “New Financial Model” Paper – 2. Read the full paper for detail of this Model from below link