Discussion on Pension Reforms

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Discussion on Pension Reforms

Pension Reforms

Pension reforms have taken centre-stage in recent years for a number of reasons. Thanks to the dramatic improvement in health- care, people are living for a longer period of time. An increased lifespan is now a global phenomenon. In India, for instance, while the total population is expected to rise by 49 percent between 1991 and 2016, the number of elderly people - those aged 60 and above - is expected to rise by 107 percent.

The longer lifespan means people live for more years after retirement than they did before, even as traditional and informal support measure" like joint family system are slowly disintegrating. In the absence of a sound pension system, which ensures economic security in old age, there is an increase in the number of poor belonging to the older age group. At the same time pressure on government services such as public health increases. The problem is far more acute in the West, where the birth rate has been declining for a long time. Meanwhile the proportion of the aged is expected to rise rapidly.

Except for government employees and those in some private concerns, the vast majority of the Indian population does not enjoy the benefit of old-age pension. The Old Age Social and Income Security (OASIS) report sponsored by the Ministry of Social Justice & Empowerment estimates that barely 11 percent of the estimated working population is eligible to participate in formal schemes meant to provide old-age income security. The demographic transition coupled with poor coverage means that we are moving inexorably towards a day when we would have a large number of elderly destitute.

As far as government employees are concerned, their pensions are a charge on the Consolidated Fund of India, which means that whatever the pension expenses of its staff, the government merely debits its account to that extent. Following the recommendations of the Fifth Pay Commission, the pension liabilities of the government have gone up sharply, putting a severe burden on finances. Prudent fiscal management would require the creation of a separate fund from which government pensions are paid, just as in the case of Employees Pension Fund, so that it does not become an open- ended liability.

Workers in the organised sector are covered under the Employees Provident Fund Scheme. Currently 177 industries and classes of establishments notified by the government are covered under the Employees Provident Fund Act, 1952. All establishments in these industries that employ more than 10 workers are required to subscribe to the schemes under which both the employers and the employees must make an equal contribution to the Provident Fund. This varies between 10-12 percent of the employee's basic salary. Since 1995 onwards 8.33 percent of the employer's contribution is diverted to an Employee's Pension Fund. Apart from this, the self-employed and professionals can avail of the Public Provident Fund. This scheme has a 15-year lock-in period - subscribers are required to deposit a minimum of Rs. 160 per year; the maximum is Rs. 60,000 - with a limited facility of withdrawal. However, the vast majority of those in the unorganised sector are completely out of the safety net.

There are two kinds of establishments - those that are exempted by the Provident Fund Commissioner and allowed to manage funds on behalf of their employees and those whose funds are managed by the Employee's Pension Fund (EPF) organisation. The funds collected under EPF are managed by the Board of Trustees, which includes members of the Provident Fund Commissioner, the employer and the employee. The Board hands over the funds for management to a fund manager. The latter is required to strictly adhere to an investment pattern stipulated by the government. To ensure safety of the funds, the bulk of these are mandated for investment in government securities where there is no risk of default.

Each year the Central Board of Trustees, controlled by the Union Government, announces the rate of return to subscribers. Till mid-2000, the rate of return on PFs was 12 percent per annum.

However, after the rate of interest on small savings was reduced in January 2000 and this was followed by reduction of the rate of interest in the general provident fund of government employees, the government reduced the rate of interest on EPF as well to 11 percent per annum. Currently, the rate has gone down even more to 9.5 percent per annum.

 

The present system is quite inefficient. The monolith EPF is unable to cope with the demands of a huge subscriber base. Even in the case of exempted funds, which manage their own funds, the constraints on the avenues where they may invest limits the kind of returns they can earn for their subscribers. Hence there has been a growing demand to allow these funds greater flexibility in their investment decisions. Since pension funds are long-term funds, the bulk of these funds are invested in infrastructure projects. Pension reforms thus kill two birds with one stone - it provides old- age security and funds for infrastructure investment. 



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