The government, going by a news report in The Economic Times, is looking at finalising a social security plan for around 10 crore workers, or around 22% of the country’s work force. The plan is to cover not just industrial workers, but also those in agriculture and other sectors. If the news is correct, this is great news in a country where a very small proportion of people are covered by any form of social security. There are a little over one crore subscribers to the New Pension Scheme (NPS) and Crisil estimates there were another 3.6 crore persons under various other pension schemes such as EPFO—and even here, thanks to a large proportion of people making premature withdrawals, the actual post-retirement corpus is very low. In which case, most retired people have to rely on the generosity, and earning ability, of their children. How much the government plans to contribute is not clear. But if, say, it contributes Rs 10,000 per year in a pension fund for 30 years, that is good enough for a retirement corpus of Rs 18 lakh if the pension fund generates even a 10% annual return—if, say, the person getting the pension also contributes a small amount every year, the amount increases. Though that is not enough to provide a decent pension 30 years from now, even that adds up to an annual payout by the government of Rs 100,000 crore a year.
In which case, if the government is serious about providing old age security to people, this cannot be done in isolation. It has to be part of the government’s overall expenditure on subsidies for the poor. The National Food Security Act, for instance, plans giving two-thirds of families huge subsidies on 5 kg per month of wheat and rice per member of the household. Assuming a cost of Rs 25 per kg—the difference between the cost of wheat/rice and the ration shop price—that works out to an annual government expenditure of Rs 120,000 crore for 80 crore persons. If, however, the subsidy is reduced by half, by either reducing the per-unit subsidy or restricting the number of persons who get the subsidy, this can be used for the pension payments and make the scheme that much easier to fund every year.
Simultaneously, the government is also working on the draft labour code on social security that is expected to give flexibility to employers to select private or government pension, provident fund and health insurance schemes. Given that employees in the organised sector have to mandatorily contribute around 24% of their wages to Employees Provident Fund (EPF) and 6.5% to Employee State Insurance Corporation (ESIC)—ESIC applies to workers earning under Rs 21,000 per month—this will be a big relief. The EPFO offers a return of around just 8% while privately-run pension funds (under the National Pension Scheme) offer significantly higher returns—in which case, the mandatory savings will fetch a higher post-retirement corpus under NPS. And, in the case of ESIC, given its claims ratios are much lower than for any commercial insurance scheme, workers will benefit by being able to buy individual—or group—insurance products. Given it was in the 2015 budget that the finance minister had talked of both EPF and ESI having hostages instead of clients, and had promised that the government would provide them alternatives, the sooner the law is amended to allow this, the better.