Column: Stop pandering to just 5% of the workers

Written by Manish Sabharwal | Updated: Feb 7 2014, 10:02am hrs
In 1944, Jawaharlal Nehru wrote from Ahmadnagar Jail, "Whether we were foolish or not, the historians of the future will judge. But we aimed high and looked far". I am sure the great statesman would have been saddened by the recent decision of the Ministry of Labour and Employees Provident Fund Organization (EPFO) that makes it aim low and look near. The decision to raise the minimum payment in a pension plan, whose last official valuation report said it had a deficit of R50,000 crore, and raise the coverage limit for EPFO is economic insanity, bad politics and regulatory capture by trade unions.

The EPFO's decision is being justified in the name of politics. After all, paying a higher pension is a low-hanging fruit on the tree of populism. Everybody understands that the needs of a government seeking re-election mean that good politics will not always be good economics. Politicians have temporary jobs and they are not suicidal. But I would like to make the case that if politics is the art of creating a big tent, why pick a small minority at the expense of the majority Why give 5% of the formal labour force a massive subsidy when 95% of the labour force works informally Why choose the old (existing workers) over the young (job-seekers) a few months before an election in which there will be 125 million first-time voters Why raise the EPFO salary limit when the organisation has not covered even 50% of workers it should within its current mandate Why expand the fiefdom of an institution that breeds informal employment If the finance ministry could be arm-twisted into giving money, why not use it to subsidise apprenticeships for new job-seekers

Rather than rewarding the EPFO with a bigger fiefdom, the government should have punished it with competition from the National Pension Scheme (NPS). The EPFO doesn't have clientsrather, it has hostages, and that is why it runs the worlds most expensive government securities mutual fund. More painfully, about half of its members are being cheated out of their savings and the interest on it; more than 45 million workers have paid money but are unable to claim it because of poor design, operational and technology capabilities of the EPFO that create low portability in a world where lifetime employment no longer exists. It is a myth that the EPFO offers social security; the median lump sum at retirement is less than R30,000. The biggest tragedy of our labour markets is that 100% of the net job creation over the last two decades has happened informally; the decision to raise the salary limit for EPFO applicability is a toxic move that will amplify, accelerate and magnify informal employment. We need to reduce the mandatory salary confiscation (through the EFPO, ESI, EDLI, LWB, etc.) from the current levels of 48% of gross wages for low-wage workers because many of them cant live on just half their salary. In a CTC (cost-to-company) compensation world, benefits are not over-and-above the salary but come out of it.

The Supreme Court dismissed the employers' challenge to the Employee Pension Scheme (EPS) in the early-90s because the EPFO promised that it would leave workers better off that the status quo. Despite continuously reducing benefits and conducting actuarial valuations with date for only 5% of the participants, time has shown that the current pension raise is unviable without fiscal funding. So, the EPFO has taken a well-designed and sustainable defined-contribution programme and converted it into a high-cost, unviable program that curiously has both benefits and contributions defined; this is not only unsustainable but actuarial insanity.

The recent revisions to the pension scheme are not driven by electoral politicsmost workers will not give credit to this government when they receive pensionsbut regulatory capture by trade unions. Economist Mancur Olsons work on distributional coalitionshow an organised vocal minority can hijack the agenda in a democracy at the expense of the unorganised majorityis what happened at the EPFO. The labour aristocracy of 5% of the labour force managed to position self-interest as national interest. Trade unions do not speak for Indias labour force and are the least interested in wages, benefits and working conditions of 95% of the labour force, the entire informal sector. To fix the damage, the government must do three things:

* give employees an option to opt out of EPS and divert their employer contribution to the pre-1991 defined contribution accounts,

* give employees the choice to opt out of the 12% employee contribution to EPFO so their take-home salaries rise and informal employment comes down and,

* give employees the choice to make the Provident Fund contributions to the EFPO or the National Pension Schemes most conservative portfolio.

Only a fool would deny the shame of Indias poverty but massive government spending in the name of the poor has converted a high-growth, low-inflation economy into a low-growth, high-inflation one. The best medicine for poverty is creation of formal employment opportunities by the private sector. If job creation takes time, we should use the R3 lakh crore being doled out in central government subsidies to create an Aaadhaar-based universal income benefit for all people who live in poverty. But lets not choose the old over the young and the trade unions over the workers.

The author is chairman, Teamlease Services