The Employees’ Provident Fund (EPF) in India is one of the world’s largest and most effective social security schemes in terms of clients and the volume of financial transactions. With over 19.34 crore accounts, the mission of the EPF is to extend the reach and quality of income security programmes in India. It acts as the perfect solution for salaried employees in terms of savings, tax benefits and investment.
To give an overview of the EPF scheme, each month, employees whose organisations are registered under EPF will need to contribute a certain amount from their monthly salary into this scheme. The employer typically deducts this amount before paying out the employee’s salary. The employer will also contribute an equal amount to the scheme. Both these contributions, along with interest earned, can be fully withdrawn on retirement or partially withdrawn in case of unemployment.
This year saw an unprecedented rise in EPF withdrawals due to the economy in a turmoil, a result of the coronavirus pandemic. As lakhs of employees across the country lost their jobs, they turned to their retirement savings to get them through these hardships and make ends meet. The labour ministry said that between 25th March and the end of August 2020, as much as Rs.39,400 crore was withdrawn.
A majority of these withdrawals were from Maharashtra, Tamil Nadu and Karnataka states rich in industrial activity, which the pandemic brought to a standstill. So what does this mean? That these employees had no other form of savings and dipping into their retirement funds was the only option left? Let’s analyse savings trends of millennial as compared to the older generation, both retirees and those closer to retirement.
Saving trends have seen a decline which is said to be the effect of a slow rise in income levels, rising cost of housing, high inflation and low return on investment. All these factors do not leave much room for saving. As per the budgeted rule advocated by experts, 20% of a person’s monthly salary should be saved, with 50% going towards needs and 30% towards wants. This is the practice the older generations followed and made wise investments in property, shares, bank deposits, gold, etc.
The millennial generation’s attitude towards saving and investing is quite different. Though this generation is typically labelled an entitled, spoiled lot, they worry that they will never save enough money to buy their dream house or even retire when their parents did. Many are still struggling to either find a decent paying job or to retain one. They are also sceptical of the financial advice given to them by their parents and prefer to follow their path.
The other factor to consider with the present generation is their spending habits. Luxuries precede necessities and coupled with immense peer pressure; it often leads to high credit card bills or debt. The rise in keeping up with the latest trends in gadgets, clothes, cars and vacations leaves little to no savings left for worthwhile investments.
A lot of the pressure on millennials to keep up with a particular trending lifestyle comes from social media. The glitz and the glamour advertised makes for an excellent case to spend and not save. This means that financial milestones are limited to only something which can be posted for others to envy. Lastly, this generation does not view job loyalty the way the previous generations did. Now it has become all about jobs that offer quicker promotions, higher pay, fair treatment and autonomy being the preference.
Without any savings, what will this generation rely on if a calamity were to hit? EPF is the only logical answer due to it being a sure shot source of income, as most companies mandatorily impose this scheme. The monthly deductions from salary don’t allow employees to feel the pinch as compared to making a lump sum investment. In a case like this, with the pandemic rendering several people unemployed, the EPF corpus comes to the rescue to make ends meet.
What lies beyond once the EPF balance gets extinguished or post-retirement is still a question no one has answers to. Who will fund their retirement? Or a medical emergency? Previously, withdrawing the accumulated balance only happened if a significant crisis hit or on retirement. Now, it’s become the go-to as it could probably be the only source of investment millennials have. The trend of saving money has seen a massive downfall in the past decade. Unless this generation makes some radical changes to their lifestyle and spending habits, they could be setting themselves up for disaster.
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Athena is a globe-trotter whose aim is to see 30 countries before she’s 30. When she’s not travelling, she’s busy planning her next trip. She’s a Chartered Accountant by profession with a keen focus on GST. She writes by day and reads by night.