How Inflation Can Affect Pension Schemes in Retirement

How Inflation Can Affect Pension Schemes in Retirement?

One of the main aims of life is to live the golden days of our life after retirement worry-free. For that, people invest in many schemes so that they can build a corpus or they can draw a certain amount monthly as a pension. However, the inflation rate is high in India and it is affecting life-long savings in different ways. In that case, one needs to plan his/her savings in such a way that it can successfully combat the inflation rate. In that case, investing in a proper and fruitful pension scheme is very important. In this article, we are going to discuss different tentacles of inflation on pension schemes and how we can cope with that. 

What is Inflation?

As time goes by, the prices of everyday things go up. With time, the hike in the purchasing price of things is called inflation. The value of money decreases. At the same time, it also decreases the power of purchasing things, and in the long run, it affects savings. 10 years ago the savings amount you thought would be enough for you and your family to sustain, after 10 years, that amount seems very less to cope with the situation. As a result of that, lifestyle decreases and the dreams we keep to fulfil in our retirement days cannot be fulfilled. 

Retirees are more prone to the effects of inflation because, after a certain point of time, their income becomes stagnant. On top of that, everyday things such as food, medical expenses, healthcare products, etc become costlier. As a result, retirees are forced to decrease their lifestyles and cut down their budgets in many aspects. Therefore, it would be highly recommended to keep a check on the inflation rate always and the possible ways to battle that.

What Are The Factors That Influence Pensions?

Several factors can affect the inflation directly. A few important mentions are as follows.

Demand-pull Inflation:

Demand-pull inflation refers to the type of inflation where the demand for goods exceeds the supply of the same thing. If the supply is less than the demand, then it is likely that the purchase price of the goods becomes inflated. 

Cost-push Inflation:

This type of inflation happens when the total supply of goods in the market falls. Increased cost of production often results in a fall in aggregate supply. If the supply falls and the total demand remains, then it creates pressure in the market causing inflation. 

Expansionary Fiscal Policy:

This often happens if the government brings any changes in their policies such as taxation, or an increase in the expenses of the infrastructural economy. Usually, in the financial budget, this can happen. If the price of the material or service is increased from the side of the government, then the businesspersons are likely to hike the prices of the material. Altogether, this has an effect on the purchasing price of the things from both ends, businesses and consumers. 

Expansionary Monetary Policy:

If the central banks lower the interest rate, it can have an effect all over the market. Central banks like the Reserve Bank of India can expand the money supply and lower the interest rates just to give a boost to the financial market of the country. This leads to more demand for services and goods in the market. 

Monetary Devaluation:

If the supply of money in the market is too large, then the value of money decreases, just like the fact that if the supply is too much then the value goes down. Therefore, if the value of money goes down, the power of purchasing things will go down simultaneously, and this would cause inflation.

What Are The Effects of Inflation On Pension Funds?

The important mentions are as follows. 

Reduced Pension Value:

If the inflation rate is too high, then the value of the amount of money will go down subsequently. The amount that seems to be sufficient today, can seem very less after 20 years. The pension amount will turn into just a certain percentage. This could result in a decrease in lifestyle after retirement. 

Outdated Pension Benefit:

Suppose, your pension scheme is from the time when the inflation rate was not that high. Therefore, your old salary structure might be enough for that time, but that cannot cope with inflation.

Cost of Living:

Some pension schemes offer inflation adjustments periodically, especially annually. But, these adjustments are not guaranteed and it depends on the country’s CPI which means the price index. If this happens, then it can also pose problems for the pensioners. 

More Contribution:

When a pension scheme struggles to meet the inflation rate, then more contribution is needed from the side of the investor. Keeping in mind the fact of limited income, this can be challenging to invest more money in that scheme whereas the income remains more or less the same. 

High-interest Rate:

If you have taken a loan and the interest rate increases suddenly, then you have to dig a hole from your savings to pay off the loan. Hikes in interest rates can badly affect one’s pension scheme. 

Lack of Financial Literacy:

This is one of the vital points, especially in countries like India where people are still living in a joint family. Therefore, there is a tendency that the younger ones are taking care of the older ones. This puts pressure on the younger ones, and at the same time, the older ones do not focus on how to do savings and do not even keep track of the market inflation.

How Can Inflation Pose a Problem for your Retirement savings? Case study

For your better understanding, here is an example. 

Mr. Bose is a 70-year-old Kolkata-based pensioner. He retired 10 years ago at the age of 60. At that time, his pension was Rs. 30,000. And in the year of 2014, it was enough for him to run his household. Over the years, the inflation rate has gone high. Therefore, his expenses have become Rs. 45,000. But at the same time, his pension has remained the same, that is Rs. 30,000. To cope with the situation, he now has to dig a hole in his savings. But, if this goes on, his savings will also go dry. 

This is a real-life example that shows what inflation can do to your savings, and how it can affect your old age. The only way to fight against it is to find a good pension scheme and invest in it regularly. Therefore, one has to be very careful while investing in a pension scheme.

How Can You Protect Your Retirement Savings From Inflation?

Here are a few measures that you can take to prevent yourself and your pension scheme from being affected by inflation

  • Understand your needs:- The most important thing is to understand your needs and lifestyle. Keep an eye on the market, and keep track of the market to trace the growth of inflation, at least for the past 10 to 15 years. Keeping in mind all the parameters, you set up your investment goals, and try to find a suitable pension scheme.
  • Invest in equities:- Equity funds are market-linked though it has the potential to give you higher returns that can help you to float above the inflation. If you invest in equities then it will always give you higher returns than market inflation.
  • Diversify your portfolio:- Do not invest some lump sum amount in one scheme. If it happens it may not give you the expected return or that fund can also run into loss. Therefore, it is always wise to diversify your portfolio. If you are investing 10% in government bonds, try to give 15% to 20% to the equities. This is how you can immune yourself from market volatility.
  • Review and make adjustments:- It is always recommended to keep a tab on the market and your portfolio regularly. If you see that one fund is consistently going in loss, you can make the necessary changes and adjustments accordingly. You can always consult a financial advisor for better results.
  • Start early:- Compounding interests are always beneficial if you start investing early. It helps you to earn not only on your invested amount but also you can earn interest on your returns. If you start early investments, you have more years to accumulate your money. It is advisable as soon as you start earning, you should start investing in some pension schemes to live your retirement life worry-free.
  • Build Guarantee-proof Investment:- Investment in some retirement schemes that can guarantee the benefit is always advantageous. Suppose your scheme would give a double return in case of the untimely demise of the policy-holder, or if your pension scheme generates a regular, or monthly revenue then it would be beneficial for you and your family. These types of financial instrument products always help to accumulate and generate money so that you and your family can live life without tension.

Government Initiative To Combat Inflation

Keeping in mind the needs of the retirees, the Indian Government has come up with certain pension schemes that help individuals invest in a sustainable way. Here are the mentions.

  • Pradhan Mantri Vaya Vandana Yojana (PMVVY):- LIC runs this policy. The Government of India launched this policy in 2020 to provide pensions to people who are above the age of 60 years. It is a non-linked, non-participating scheme, subsidised by the Indian Government. The current interest rate of this scheme is 7.4%.
  • Senior Citizen Savings Scheme (SCSS):- It is one of the most popular pension schemes among retirees. It is more or less like a fixed deposit. It is one of the safest schemes. The current interest rate is 7.4%.
  • National Pension Scheme (NPS):- It is also a pension scheme introduced by the Government of India replacing the Old Pension Scheme. It is a voluntary scheme. This helps you to do your savings in a planned way.
  • Employee Pension Scheme (EPF):- This is a social security scheme provided by the Employees’ Provident Fund Organisation (EPFO). The employees working in an organised sector are eligible for this scheme. This scheme was launched in 1995. One can get a pension from this scheme only if he/she reaches the age of 58 years. You can only avail of the benefits of this scheme if you have provided a service of a minimum of 10 years.


Retirement finance planning is one of the most crucial jobs that one has to do. Without proper retirement planning, one cannot combat inflation, and cannot maintain the lifestyle as well. For that, investing in a proper and suitable retirement scheme is very important. One can take the help of a finance expert to be on the safer side. Or else, one can also use the retirement calculator to calculate his/her needs keeping in mind the inflation, and can choose the ideal scheme to live the golden days of life securely.

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