Widening the Social Security Base

For the first 50 years since independence, the mainstay of India's policy response to retirement security for its citizens was a liberal tax-financed pension limited to its own employees and an ineffective and inefficient pension and provident fund arrangement for formal sector workers covered by the EPFO. While EPFO has failed due to a combination of a highly liberal view on pre-retirement withdrawals and a highly conservative and outdated view on investment policy, the civil service pension scheme has succeeded at causing an implicit pension debt (IPD) of over 64 per cent of GDP even though it covers barely 5 per cent of India's workforce. This liability is likely to rise by over 30 per cent only on account of implementation of the Sixth Pay Commission recommendations.

An attempt at achieving broad-based pension converge was made in 1969 through the public provident fund (PPF) – a scheme that is today being used mainly as a short-term savings cum tax planning tool by less than 40 lakh subscribers. The only fallback for everyone else, who was unable to save for old age, was a national old age pension of between Rs 75 and 200 for the destitute elderly. Since eligibility for retirement benefits has traditionally been driven by employment terms, formal pension arrangements implemented between 1947 and 2000 have bypassed over 90 per cent of the 450 million workers in India, most of whom do not have an employer.

The last decade however, has witnessed an unprecedented level of policy attention on issues of old age income security for India's citizens. The Project OASIS Report initiated this process in 2000 by highlighting the unsustainable fiscal and social cost of civil service pensions. In parallel, it focussed the government's attention on the limited coverage and inefficacies of other existing pension and provident fund arrangements, and even more importantly, on the larger problem of India's huge pension coverage gap.

In January 2004, the government finally took the first crucial step towards establishing a much overdue, broad-based retirement savings system when it truncated unfunded pensions for civil servants in favour of a contributory scheme in the form of the new pension system (NPS). In the wings were plans to quickly extend the arrangements on a voluntary basis to India's wider workforce of over 400 million workers who, with few exceptions, have little to fall back on in old age apart from an increasingly fragile family support and whatever savings they are able to marshal during their active working life.

Importantly, the policy debate surrounding the NPS over the last decade has also prompted a number of other reforms in this area. These include the new Unorganised Workers Social Security Act, 2008 as well as new efforts at bringing excluded PFs, gratuity funds and superannuation schemes under a robust regulatory oversight. A unique effort has also been launched recently to deliver micro-pensions to the working poor in multiple states under a joint venture with UTI and SEWA while three state governments have recently introduced co-contributory pension scheme for their working poor.

A key public policy objective of such efforts is to achieve broad-based social protection to reduce vulnerability in old age for India's unorganised sector workforce. Concomitantly, the arrangements should reduce potential future budgetary pressures by increasing self-provision, contribute to economic growth by increasing aggregate long-term savings, provide greater depth and liquidity in Indian financial markets and facilitate labor mobility through fully vested portable pension accounts.

Five years on however, and in one of the sadder ironies of India's commitment to democratic processes, little progress has been made. At the heart of this inertia have been the self-styled advocates of the people in the person of left leaning politicians struggling to accept India's march to full market economy status with all the trappings that this involves. While the left has inevitably lost this debate, the damage this delay has caused to the welfare of India's future elderly is palpable for it has blocked interest in participating in a broad-based retirement savings system among a large number of India's workers interested to save for their retirement.

For example, the last IIMS Dataworks survey reveals a population of over 8 crore workers who are interested in joining the NPS. Lying beyond are a large number of government and private sector workers who are already covered by various mandated pension schemes, many of whom obviously believe that their present entitlements are inadequate and are therefore interested to voluntarily save more in order to supplement their retirement incomes.

If latent demand for NPS from these groups were fully harnessed, this population could contribute an estimated Rs 57,000 crore to the NPS in the first full year of operations and over Rs 13 trillion in cumulative terms by 2019. What is most encouraging about the composition of the NPS’ latent demand is that it is broad-based with an even geographical spread and it encompasses the full span of age, income and occupational cohorts. Just under 70 per cent of the latent demand market has an existing bank account and a further 17 per cent have savings with India Post. Hence, India's ability to bring a broad-based voluntary pension scheme into being is on the whole very positive as existing institutional infrastructure should be capable of being successfully leveraged without the need of significant new infrastructure investments.

As things stand however, India appears to be moving forward with a poorly managed pension reform peppered with a large number of unconnected efforts. It is essential at this stage for the government to produce targeted solutions for various segments of India's workforce and to bring all current efforts under an overarching and actively managed national pension policy that is both equitable and inclusive. In the process, it is imperative to also convert the PFRDA into an independent statutory authority and to arm the regulator with the necessary funds and capacity to rapidly bridge India's pension coverage gap within the tenure of India's demographic transition.

(Gautam Bhardwaj is director of Invest India Economic Foundation)