A Safety Net With Holes

The approach and ideas in the NCEUS report prompt some fundamental questions: Does India have the administrative capacity to implement a very complex, means-tested, universal social security scheme which bundles pension and PF benefits, life insurance, unemployment benefits, health insurance and maternity benefits targeting over 300 million unorganised sector workers? Our landscape is littered with failed government programmes. In an environment where the most basic functions like the police or schools work poorly, can we think of giant new programmes which will be manned by the kind of government employees who do not show up to teach at school?

The next dimension is the fiscal one. Such welfare programs run into fiscal trouble at two levels. First, owing to the malpractice that inevitably takes place with badly designed schemes, the payments made are much bigger than those estimated at the outset. Second, as India ages, the cost of apparently small subsidies to the elderly will skyrocket. Can India afford a population-wide social security scheme? Even in Europe, where the administrative capacity is good, such welfare programmes have led to macroeconomic and political disasters in country after country. In India, the outcomes will only be worse, and the old age problem is big enough to derail India’s economic development.

Modern thinking on these issues has led to somewhat different policy approaches. In March 2005, the government of India tabled the PFRDA Bill in Parliament. This Bill seeks to provide a legislative basis for introducing a well regulated, efficient and broad-based retirement savings platform targeting the over 300 million unorganised sector workers who have been traditionally excluded from formal pension arrangements. This New Pension System (NPS) is a superior framework, where individuals would be able to build up pension wealth through their working life. The focus of the NPS has been upon sound administrative arrangements. Enormous effort has been devoted to designing administrative mechanisms which will work under Indian conditions when implemented across the country. The role of the government in the NPS is upon the genuine public goods of institutional arrangements and regulation.

Of the roughly 360 million paid workers in India, around 50 million persons are employed by either central or state governments or in large private or public sector companies. This “labour aristocracy” is already very well taken care of. Of the excluded 310 million workers, the PFRDA Bill apparently only targets the workers who have the financial capacity and interest in saving for their retirement.

Data from the Indian Retirement Earnings and Savings (IRES) Survey 2004 commissioned for the Ministry of Finance suggests that roughly 54 million (or 15%) of the unorganised sector workers have both the interest and financial capacity to be able to save for an above poverty pension. These include farmers and agricultural labourers (37%), wage labourers (15%) salaried workers in smaller private firms (10%) and shopkeepers (23%).

This data reveals that another 120 million workers are already interested in saving for their retirement. However, even with regular contributions over multiple decades, many of these workers may not be able to save enough for an above poverty pension.

For this population a harmonised effort on government support for social security for the poor, through the PFRDA Bill, can have a significant impact. The government should offer a co-contribution — from the exchequer —for poor people who connect into the NPS. This would motivate enrollment and regular contributions over multiple decades, and ‘top-up’ their retirement savings to more meaningful levels. Such an approach reflects a harmonious combination of the PFRDA Bill – which has the strength of a richly thought out nuts-and-bolts institutional architecture — and the new NCEUS report which seeks to help poor people based on fiscal subsidies.

A critical facet of old-age income security is the rates of return on financial assets. High returns can convert modest savings into meaningful retirement outcomes. In this case as well, the NPS architecture with central recordkeeping, professional funds management and regulatory protection through the PFRDA would be an optimum implementation platform for an efficient co-contribution mechanism. In this direction, the UTI-SEWA micro-pension scheme recently launched by the finance minister has clearly demonstrated the viability of an individual account pension arrangement for even low-income workers.

While the present government’s concern for social security is laudable, it is imperative that this does not translate into an unsustainable administrative and fiscal crisis for future governments. The best way forward involves using the New Pension System, and the PFRDA Bill, to create a sophisticated and well-thought out administrative structure, and support the needs of poor people through co-contribution by the government.

(The writer is Director, Invest India Economic Foundation)gautam@iief.com