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Track these pension plans

Railway budgets are usually in the news for announcements on innovative routes and fare changes. This year, however, the railway minister an...

Railway budgets are usually in the news for announcements on innovative routes and fare changes. This year, however, the railway minister announced a pension scheme for the unorganised workforce in the railways. He wants to extend the “unorganised sector workers social security scheme” (USSS) started by the previous labour minister under the aegis of the Employees Provident Fund Organisation (EPFO) in January 2004 to his employees. A judgement about the wisdom of this announcement will only flow from an understanding of the scheme and its implications for the people it is supposed to serve.

Under this scheme every worker and his employer are to contribute Rs 50 each per month. Regular contributions would lead to accumulation of points in the worker’s account. A 30-year continuous contribution would accumulate 480 points, enough to entitle the worker to a pension of Rs 500 after the age of 60. Besides a monthly pension, the scheme also offers a personal accident policy, a health cover policy and spouse pension.

While a pension of Rs 500 might seem generous at the outset, a closer look reveals otherwise. The scheme promises a nominal amount of Rs 500, 30 years later. The present value of this amount as of today is Rs 154 only. Assuming the Rs 500 annuity continues for the life of the worker, its value when he is age 80 would be even lower. The ability of this pension to finance consumption in old age would therefore be severely limited. Suppose the worker were instead to just accumulate his money in the private markets. Assuming a modest real rate of return of 2 per cent, he would be able to buy an annuity of Rs 405 (in real terms) or Rs 859 (in nominal terms). This seems far more generous than what USSS has to offer. If the railway minister is indeed serious about security of the poor, it may be wise for him to rethink offering this scheme to his employees.

The health insurance cover that the USSS promised to provide was being bought from the Universal Health Insurance Scheme (UHIS) launched by the NDA in the last budget. In his budget scheme, the new FM made the scheme exclusive for below poverty line (BPL) households. This makes USSS participants ineligible for health insurance. It remains to be seen how the EPFO is going to manage to provide health cover without the UHIS. It is indeed ironic that two ministers from the same government announce contradictory policies, within two days of each other.

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The USSS runs into trouble on administrative issues too. At a fundamental level the administrative responsibility of this scheme is entrusted to an organisation designed and constituted for the organised workforce in the country. The characteristics of the two sectors are hugely different, and the EPFO might find itself ill-equipped to deal with the intricacies of the unorganised sector. For example, under the USSS, a worker’s contributions are tied to his employer. The unorganised sector is usually believed to be susceptible to friction in employment and labour migration. It seems unreasonable to tie the contributions of a worker to his employer. Frequent spells of unemployment would place the burden of the employer contribution on the worker at a time when he has no income certainty. Also, there is a penalty in terms of interest rate for non-contribution. The very nature of the unorganised sector makes it difficult to imagine workers being able to contribute on a continuous basis. It is a well known fact that people in the unorganised sector stop working earlier than formal sector employees. A retirement age of 60 for men and women alike seems out of place with realities of the unorganised sector.

Administrative costs play an important role in determining the final amount the worker gets at the time of retirement. The USSS is to keep administrative costs below 1 per cent of assets under management at all times. Calculations show that this charge will add up to 20 per cent of the accumulations of the workers over a 30-year horizon. This is a significant amount considering that the scheme is targeting a segment with very low earnings and therefore low capacity to contribute.

If the unorganised employees in the railways were indeed to be part of the scheme, the railways would be responsible for the share of employer contributions. The government has also promised a contribution of 1.16 per cent of wages to the scheme. As the programme matures, this may place a burden on the railways and the government to meet the demands of the scheme. The railways are already in trouble on account of their pension obligations towards their employees. They face the prospect of having to pay out almost half of their gross traffic receipts as pensions to retirees by 2020. It does not seem prudent for the minister to take on additional liabilities, at a time when his ministry is unable to meet the existing ones.

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The USSS, though very benevolent in its intentions, does not pass the test of credibility on issues of benefits, administration, costs — all of which are crucial to making any pension system viable and successful. It also does not make fiscal sense for the railways to commence this scheme at this point in time.

The writer is research associate, India Pension Research Foundation, New Delhi

First published on: 15-07-2004 at 12:00:00 am
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