Burdened by sentimental understanding and outdated legacy institutions, along with complexity in analysis, India’s social security system is in need of an overhaul.
By Mukesh Anand
In his speech prior to the budget presentation for FY23, the Rajasthan CM announced that on or after January 1, 2004, all government officials will return to the ‘old pension scheme’ for all government officials. all levels in India. For less understood reasons, pension programs and their reforms in India are treated as an emotional issue rather than a socio-economic one. Moreover, the discussion that preceded the introduction of the ‘national pension system’ overseen by the Pension Fund Regulatory and Development Authority (PFRDA) had moved away from concerns about equity and sustainability to extolling the benefits of investing in market-based instruments that, with a bit of luck, yield a return to yield higher benefits than was insured under the old scheme. This has now been realized to be too good to be true.
Unfortunately, few attempts have been made at a system-wide socio-economic consideration and ‘reforms’ have only increased the patchwork. However, one could make an estimate using a benchmark such as the five-pillar design (popularized by the World Bank) of a social security system. In this set-up, simply put, Pillar 0 (P0) serves social pensions; P1 offers fixed benefits (DB) in a pay-as-you-go scheme (PAYG); P2 consists of mandatory defined contribution plans (DC); P3 consists of voluntary contribution plans; and finally, P4 contains schemes with benefits in kind. Such an exercise could clarify the inclusion of workers, the coverage of the elderly and their distribution in the system. Furthermore, one could trace the concept of public resources, benefit-sharing and objectively discuss equality and sustainability issues.
A translation of the existing system in India to the five-pillar design roughly looks like this: P0 is the National Social Assistance Program (NSAP) for the poor among the elderly, widows and the disabled, state variants of similar programs for special groups; P1 includes DB (old retirement plan) programs for federal and state government civilian employees, defense personnel, and freedom fighters; P2 is the Employees Provident Fund (EPF), the Jammu & Kashmir Employees Provident Fund (merged into EPF in 2019), Assam Tea Plantations Fund, Coal Mines Provident Fund, Seamen’s Provident Fund, National Pension Scheme for Federal Government Employees (NPS -Fed), and NPS status; P3 consists of Public Provident Fund (PPF), Senior Citizens Saving Scheme (SCSS), General Provident Fund (GPF), Atal Pension Yojana (APY); and P4 has the Annapurna Scheme, Integrated Program for Older Persons (IPOP).
Managing the system through various line ministries and departments involving frequent subtle changes in program design, including in their naming, can easily create enormous complexities for regular system-wide analysis. Note further that of the schemes and programs mentioned above, PFRDA only commands NPS-Fed, NPS-St, and APY. The regulatory space remains cluttered with a number of legacy institutions dealing with declining or minuscule membership (for example, SPF has fewer than 0.06 million members compared to EPF’s pension plan with 34.9 million accounts).
System-wide study with some limitations confirmed that nearly 80% of the 470 million employees are excluded. Pillars P1, P2 and P3 comprise only 2, 10.5 and 7.5% of employees respectively. Furthermore, almost 84% of those in P2 are members with EPF. PFRDA’s mandate extends to less than 1.34% of all employees, and an additional 4.5% in voluntary (P3) schemes (namely APY and NPS-All Citizens). Even if all government workers were returned to the old pension plan, only the distribution of workers among P1 and P2 would change to 3.4 and 9.1% without changing the status of P3 or excluded majority.
Of the nearly 135 million elderly people (over 60), more than 61% have no pension benefits. Those receiving benefits under P1 constituted about 13% of the elderly, while nearly 19% received benefits from P0. A majority of beneficiaries under P0 and P2 receive annual retirement benefits below or close to the poverty line. However, the average annual pension of all beneficiaries in all plans is about half the PCGDP, while for ex-government employees it is almost twice the PCGDP. Furthermore, average benefits among state government retirees are higher than the average for federal government retirees, and the average for former defense employees is much higher than that of former civilian employees.
The system’s annual public spending averaged 11.5% of total government spending between 2010-1 and 2018-9, growing from 2.83 trillion to 6.41 trillion. Of this, the state governments contribute an average of 60%; but the share defined by P1 has grown from 58.5 to 67.6% and that is what one should clearly focus on for the rationalization of benefits. Without that rationalization, given the limited resources, it will probably only lead to a reduction in social security by increasing the number of excluded workers and uncovered older people. Worse still, it continues to adversely affect the cost of public services, public sector employment, the size of public services and generally the labor supply. It is imperative to design a just system to grow social capital.
Given that discontent among the post-2003 recruits was simmering, as admitted by the Rajasthan CM, his announcement of return is not surprising. And in the past year and a half, evidence abounds of full or partial reversals in more than half of emerging economies that had opted for full migration to a privately run available-contribution (DC) system. The ‘reform process’ involved at best an effective pay cut in civilian service and at worst a new wedge in India’s compartmentalised labor market. Indeed, it not only weakened the social pact, but further undermined the sense of security of cohesion for risk-pooling and risk-sharing.
The author is an assistant professor at the National Institute of Public Finance and Policy (NIPFP). Co-authored with Rahul Chakraboty, research fellow, NIPFP.
This post India’s Social Security Problem Needs More Than Patchwork
was original published at “https://www.financialexpress.com/opinion/indias-social-security-problem-needs-more-than-patchwork/2467127/”