Windfall gain for the poor?

Workers joining the Pradhan Mantri Shram Yogi Mandhan Scheme for the informal sector will get a better return on their savings if they enrol later in their careers

Piyush Goyal stumped critics of the Atal Pension Yojana (APY) by proposing the Pradhan Mantri Shram Yogi Mandhan Scheme (PM-SYM) for labourers in the informal sector in the Budget for 2019-20, which has several novel features. In particular, it remedies two major problems associated with the APY.

First, the government’s contribution, equal to that made by members of the scheme, which was initially for five years, was withdrawn within a year of the APY’s launch for new beneficiaries. Under the PM-SYM, however, the government promises to maintain its contribution during the total period of accumulation (until the age of 60).

Second, the monthly installment for those who join the APY at the age of 18 years for a pension amount of Rs 3000 a month is Rs 126, which is considered unaffordable for the poor. Under PM-SYM, the individual’s contribution is only Rs 55, less than half that under the APY. 

It would, however, be erroneous to stop the comparison at that. The APY is basically a long-term savings scheme, guaranteeing a certain interest rate to its members, irrespective of their age of entry. They can receive their accumulated saving with interest at 60 years of age, as a lump-sum amount.

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Alternately, they can choose to get only the interest as monthly pension, so that their spouse or nominee gets the principal amount on death. It assures that the corpus an individual builds through fixed monthly contributions and guaranteed interest is his/her entitlement.

The PM-SYM, on the other hand, appears to have been designed with a welfarist perspective of concern for the elderly. The scheme, as placed in the public domain, has a built-in bias in favour of those joining at the age of 40, since the total contribution she makes would be much less than what would have been the case had she joined at the age of 18. In fact, the total deposits would be less even if she joins at the age of 29 (see table alongside). The conditionalities thus tend to become favourable with age, which was not the case with the APY.

Needless to say, the incentive to join the scheme at an early age would be less, also because the probability of survival until the age of 60 is less at 18 years than at 40 years. The worst-hit, however, would be those who leave the pension scheme within a period of less than ten years since they would get only their contribution money with interest accruing at the savings bank rate. Importantly, the corpus amount is credited to the national fund after the death of the subscriber and the spouse.

To compare the benefits from the two schemes, both may be viewed as interest support schemes. The contribution of equal installment under the PM-SYM may be seen as though the government is giving a high interest rate on the deposits of the member. The accompanying table computes the different rates of interest using recurring deposit and EMI calculation formulae so as to ensure that the persons joining at ages 18, 29 and 40 years receive the pension amount of Rs 3000. 

Considering that workers earning less than Rs 15,000 a month in the informal sector would have a lower life expectancy than those in the formal sector, the survival age for the rural population, brought out by the Registrar General’s office, has been used for the computation in the table. It shows that the survival age for persons aged 18 in rural areas is 72.3, which is less than the corresponding figures at the age 29 and 40 years.  Now, if the monthly contribution is Rs 55 only, an interest guarantee of 8.65 per cent is needed so that the accumulated amount at 60 years becomes Rs 274,000.

Now, if the rate of interest remains the same, this corpus can give Rs 3016 for the rest of his/her life, as per the EMI calculation formula. For a similar monthly amount, persons joining the scheme at 29 and 40 years of age, paying monthly installments of Rs 100 and Rs 200, are assured of interest rates of 10.32 per cent and 13.40 per cent, respectively. These rates are higher than that under the APY, where the rates of interest for all age groups are eight per cent during the accumulation period and seven per cent during the pension period.

Clearly, an informal-sector worker joining the PM-SYM at the age of 18 is given, under this much-hyped programme, interest support which is about the same as for the organised sector. The former, however, runs the risk of losing the entire deposit in case of her and her spouse’s death, since there is no life insurance cover in the scheme. Also, in the case of death of only the member, the implicit rate of interest will be less, since the spouse’s pension is only half (i.e., Rs 1500 a month).

Importantly, the inflation factor has not been brought into the computation, as the state is expected to protect the member against high inflation. Workers joining at a later age, however, get a much better return on their saving. The rationale for the incentive — to workers to join the scheme later rather than earlier in their life — needs to be explained.    

Amitabh Kundu is Distinguished Fellow at the Research and Information System for Developing Countries. Santlal Arora is with the Institute of Human Development