The pension deficit

Topics EPFO | pension

The Employees’ Provident Fund Organisation (EPFO) is reportedly considering giving its members an option to start drawing their pension when they turn 60 rather than 58, which is the case now. Incentives such as additional bonus may be offered to those who agree to postpone the withdrawal. On the face of it, the idea makes sense because most pension funds start payment once the investor turns 60. An additional two-year window will help the beneficiary grow her or his pension kitty.

The problem, however, is the reason behind the EPFO’s move. As recently reported by this newspaper, the government is reneging on its commitment to the EPFO, and the accumulated dues are now worth over Rs 9,100 crore. Employees in the private sector contribute 12 per cent of their basic salary to the EPF and the employer makes a matching contribution. Further, from the employer’s contribution, 8.33 per cent goes to the Employees’ Pension Scheme (up to a salary ceiling of Rs 15,000) and the government contributes an additional 1.16 per cent of that. There are about 40 million active accounts in the pension scheme. The government in 2014 decided to increase the minimum monthly pension to Rs 1,000 for all subscribers to the scheme and provide about Rs 800 crore per year for this purpose. The EPFO on its own was not in a position to implement this. However, funds are due on this account as well.

What is intriguing is that part of the dues are pending since 1995-96, the year the Employees’ Pension Scheme was started. This is a good indicator of how government finances are managed in India. The government tends to postpone expenditure to the extent possible and this is not restricted to one particular area. This practice must end because it doesn’t help achieve anything. On the contrary, it can end up increasing the eventual liability for taxpayers. At a broader level, as has been argued on these pages before, the government should work with a more realistic assumption of both revenue and expenditure to improve transparency. Presenting a clear picture of the fiscal situation will also help the government manage its finances in a better manner and allow it to make the required adjustments.

Therefore, in the present context, the government would be well advised to release the funds to the EPFO. The pension fund is reported to be in deficit. Besides, the government and the EPFO should also prepare for the future. The subscriber base of EPFO schemes will increase with rising workforce and formalisation of the Indian economy. This means that the government’s liability in terms of contribution to the pension scheme will also increase over time. It may require adjustment in expenditure so that the government is able to meet its commitment in time. Further, the EPFO would need to keep the interest rate on the provident fund more flexible, depending on returns generated without taking excessive risk. India doesn’t have a robust social security system and, thus, it is important to protect and expand the institutional mechanism in place.

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