April 25, 2005
Left parties have decided to oppose the Pensions Bill that aims to create a population wide pension system. The poor who work in the unorganised sector and have no access to old age security, will be hurt the most by this decision. The irony is that the decision does not benefit the organised working class which the Left represents, in any way. It is sad to see that those who claim to be pro-poor, stand in the way of giving some help to the most vulnerable among the poor – the old.
The existing pension schemes in India focus on the ‘‘organised sector’’. There is a pension scheme for civil servants. There is the EPFO, which covers workers in the organised sector, which may be ridden with problems. While there is a small scheme run by the EPFO for unorganised workers, its coverage is very limited. Effectively 92 percent of the work force which is employed in the unorganised sector does not have access to a pension scheme.
How can India offer old-age security to poor unorganised workers across the country? One way would be to expand the EPFO’s unorganised sector pension scheme. However, as has become apparent in recent months, given the innate difficulties of a defined benefit system, the scheme is already hobbled with the problems.
At present 50- odd insurance companies and mutual funds offer over 700 financial products. They periodically engage in lobbying, saying that they are ready with these 700 products, so why is any new work on pension reforms required? However, these 700 products have only been accepted by less than one percent of the population which participates in them. This is due both to the high cost of the schemes and due to their complexity. A worker who can put in Rs 10 per day finds no place for herself in the scheme. It is hence unlikely that the present insurance and MF industries will be able to reach beyond a thin cream of the country.
While it is important that there is competition in the market, it is also important to remember that the complexity and financial sophistication of schemes makes it very difficult for uneducated workers to compare the schemes and make choices. A straight-forward and standardised set of options needs to be made available for them.
Is it possible to give the whole population a government pension? Even the idea sound ludicrous for India. Given pensions to the 8 percent in the organised sector is enough of a headache. The government does not, and will not, have the fiscal capacity to fund a population wide defined benefit scheme paid out of tax payer money. A defined contribution scheme must be designed, which is suitable for workers with little education, near zero financial knowledge, and geographical mobility. Education on planning for old age security needs to be offered to the population. To help a worker not get duped by slick marketing agents, the government should offer her an integrated front end for her pension account. All pension records must be centralised so that a worker can move from one job to another, one pension fund to another, from one city to another, with minimum friction and cost. Post offices all over the country should provide access to a central data base of pension accounts of all members. The worker should not have to deal with the fund managers directly and should need to give instructions only to the post office to move money in her pension account from one fund to the other. The Central Record Keeping Agency, chosen by the pensions regulator, should implement this for her.
This is what the new pension system seeks to achieve. Scuttling the scheme will be the most anti-poor policy the Indian Left would have advocated.
Manmohan Singh must put his foot down and not let the Left stand in the way of the most pro-poor policy that the UPA is attempting.
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