Sunil Jain: Pensioning off pensioners

RATIONAL EXPECTATIONS

Only a very cynical politician can plan a scheme that taxes and threatens to rob the not-so-well-off while giving them the impression they're better off for all the caring. This is precisely what the government did when, last fortnight, it decided it would extend the coverage of the Employees Pension Fund Organisation (EPFO) from units that employ 20 or more persons to units employing more than 10 persons. With this, according to the EPFO, the number of persons covered by a pension scheme will rise by more than 200 per cent.

According to the plan, if these people are now covered by the EPFO, they will get a large corpus at the time of retirement (from the Employees Provident Fund, or EPF part of the EPFO) and, in addition, will get monthly pensions (from the Employees Pension Scheme, or the EPS part of the EPFO) equal to around half their last income (subject to an income ceiling of Rs 6,500 per month) for the rest of their lives. Put that way, the scheme is a great one. So what's the problem?

The problem is a simple one and stems from the fact that the EPFO is in terrible shape. It has an antiquated single-entry book keeping system that makes it impossible to trace any fraud that happens; while the pension scheme was based on the understanding that the EPFO would be able to earn at least an 11.5 per cent return on its investments, the current earnings are around 8 per cent "" which is why, with each passing year, the hole in the EPFO rises dramatically (it is currently around Rs 25,000 crore and even that could be a huge underestimate). In other words, extending the EPFO's coverage at a time when it is bleeding and in terrible shape, will probably ensure it collapses. Of course, from the citizen's point of view, that's largely irrelevant since the hole in the pension part of the EPFO has to be made good by the government "" though how the government is going to make up the theft is unclear since the system can't even track such theft. 
 

TAXING THE NON-RICH (While the EPFO requires savings of 24% each month most of those in smaller organisations save just 10% of their incomes)
Annual Income in Rs	% of population	Savings as % of income
Less than 50,000	24.9	9.0
50,000-100,000	42.7	9.7
100,000-200,000	21.2	16.3
More than 200,000	11.2	22.1
Average	""	12.1

What matters more from the point of view of those who are members of the EPFO, contributing 24 per cent of their annual incomes to it (eventually, the employers' contribution of 12 per cent is really taken to be part of your salary), is that the EPFO has not been able to modernise its systems in order to be able to offer a single unique identification number to subscribers "" so, if you keep shifting jobs, it is very likely your accounts will never be consolidated in one account. Most people have at least 2-3 EPF accounts, and the problem will be a lot more severe in the case of small organisations (shops, construction sites, beedi workers, etc) where migration and frequent job changes are de rigeur. And since, in order to get pension benefits, you have to be in a job for at least 10 years, not being able to consolidate accounts will mean a loss to those being forced to contribute to the EPFO "" their contributions to the EPS at 8.33 per cent of their salary (the other 15.67 per cent goes towards the EPF), will be returned if they don't contribute for 10 years but only after significant deductions are made.

What is even more curious is that no one in the government/EPFO system thought it worth his while to see how ready people were to join them, and how capable they were of raising the kind of money being talked of. According to data collected by the Invest India Foundation's IIMS Dataworks' annual survey across the country, nearly a fourth of those employed in units employing 10-19 workers earn less than Rs 50,000 a month, and their average savings are just around 9 per cent. Asking them to raise this to 24 per cent is a huge tax. Indeed, savings levels for the entire group are around half what the EPFO system requires! So there are certain to be huge compliance issues as well. Interestingly, since more than a third of these people live in rural areas, the EPFO's job will get just that much more complicated.

Creating a pension scheme for the not-so-well-off is a welcome step, but it needs to be voluntary, based on the savings capacity of those involved, and in a system which is not bursting at the seams. But to expect cynical politicians looking at just the next elections to appreciate this is asking for the moon.