What to do with 7th pay commission ‘non-bonanza’
By Dhirendra Kumar CEO, Value Research
Eight years ago, I wrote a
newspaper column advising government employees (or should I say public
servants) on what to do with the arrears that they would get with the
implementation of the sixth pay commission.
On the face of it, one could
just repeat that advice now. However, the situation then was very
different. One, the acceptance of that pay commission report came with a
huge delay of 30 months, leading to large accumulated arrears. Most
employees got eight months to a year’s extra salary as arrears. Two,
that was the height of the global financial crisis. Many people were
exhorting government employees to go forth and spend their bonanza to
boost the economy, which was clearly not a wise thing to do from the
individual’s point of view.
The 30-month delay meant that
many were receiving an amount that would otherwise have taken them seven
to ten years to save and it was important to point out that the best
course would be to take this forced saving and convert it into a
long-term investment. This time around, things are different. The
government has acted much faster and the arrears are just six months. A
smaller hike and a much shorter delay mean that most government
employees will get an amount equivalent to barely one month’s extra
salary so there isn’t any great excitement about extra savings.
In any case, government
employees’ savings imperatives are very different from those who don’t
have lifelong infla tion-adjusted pensions that also keep getting hiked
by pay commissions. Realistically, government employees’ salaries and
pensions are now so good that someone who does not save at all for
retirement will also get by fine. This is especially true because free
lifelong healthcare is part of the package.
A long retirement with
inflation-ravaged savings does not bother government employees because
their burden will also be carried by the rest of us. The rest of the
country will work hard and pay their taxes so that government employees
are guaranteed a comfortable income and pension. Little wonder that even
the most menial, lowest-level government jobs attract thousands of
highly qualified applicants.
However, this is true only of
the older generation of government employees, that is, those who joined
before 2004.The biggest change that has come about since 2004 is that a
large proportion of government employees are on the National Pension
System. Younger employees have retirement savings enforced instead of
having pensions guaranteed from the public purse.While the final impact
on their post-retirement finances is hard to predict at this juncture,
it does mean that they will have to learn a little more about savings
and investments than the older generation of government employees had
to.
The little bit of arrears don’t
amount to much, but the higher income should be directed to long-term
savings instead of any kind of consumption expenditure. The theory
behind the Pay Commission is that its awards are a response, not just to
the rising cost of living, but also to the general rise in private
sector’s salaries and an attempt to narrow the gap thus created. I can
hear the sniggers from private sector employees but like I said, that’s
the theory. In this sense, arrears are money that is already spent.
Given the way most people’s finances are structured nowadays, I think
the first priority should be to lighten or eliminate any debt load that
one has.
Beyond debt-reduction, the
arrears, as well as the higher income is best added to whatever savings
medium the saver is most comfortable with as long as one doesn’t make
the mistake of relying on fixed income savings for the long term.
For those who want to invest for
the long-term (at least five to seven years), the best course of action
could be to shift this money gradually to a good balanced fund. As the
past has decisively shown, despite higher volatility, equitybacked
investments have long-term returns that are far superior to any other
kind of asset. A type of mutual fund that gets you most of the gains of
equity while saving you from some of the volatility is probably the best
choice.
Source : http://economictimes.indiatimes.com/
