Business Standard

Will the social security bill deliver on pensions?

DEBATE

Business Standard  |  New Delhi 

With the likely to be introduced in the budget session, the viability of the scheme becomes important.
 
K P Kannan,
Member, National Commission for
Enterprises in the Unorganised Sector

Providing a minimum social security to 300 million workers costs less than a lot of other existing schemes such as the tax benefits to SEZs
 
The proposed in May 2006 that a national minimum social security be provided to around 300 million unorganised (who are also unprotected) workers in this country. Accordingly, a bill is now under the active consideration of the government. So far, no one has really opposed the need for some social security to these workers who constitute more than 90 per cent of the workforce. Despite such a broad consensus in principle, there has been much delay "" 60 years to be specific "" in providing even a minimum social security cover to take care of the contingencies of these working poor. The current hinges perhaps on the financial cost to the government.
 
In my view, too much is being made out of the financial implications. The ultimate cost to the government (both central and state) is likely to be around Rs 25,000 crore or half-a-percent of the GDP when all the workers are covered. This could be done either over a period of five years or seven years because coverage depends on the registration of workers to the social security system. As such, the ultimate cost is a conditional one. Even compared to many other large schemes such as the Integrated Child Development or the National Rural Employment Guarantee Act, the proposed national minimum social security involves much lower financial costs.
 
Or, for example, compare the ultimate cost of this scheme to the incremental cost to the central government when the Sixth Pay Commission gives its recommendations. This is likely to be in the range of Rs 25,000 crore to Rs 40,000 crore per annum. Or take the case of SEZs, which could, as reports go, deprive the central government of revenues close to Rs 100,000 crore per annum! We need to ponder whether we have our priorities right.
 
But the attractive part of this scheme, compared to the examples cited above, is that the government is in a position to recoup part of the costs by way of a tax or cess on industry and services or a class of employers. This is because employer contributions have to be paid upfront by the government due to a number of factors including absence of visible employers for a sizeable section of the unorganised workers (for instance, street vendors and home-based workers) or multiplicity of employers for some others (such as casual wage workers).
 
What is important, in fact crucial, is the organisational challenge that includes the enforcement mechanism. The proposed national minimum social security is a package consisting of health benefits including maternity, life insurance, and old age security in the form of a monthly pension to the poor and provident fund to others. To enforce this package, a national social security board and state level boards are proposed. The state boards are the real implementers. The national minimum is the floor level social security applicable to all unorganised workers throughout the country. States could, and in fact should, add on to it by either enhancing the benefits or adding new benefits. In fact, states such as Kerala and Tamil Nadu are the real trail blazers. The recent decision of the Tamil Nadu government to pay a monthly pension of Rs 500 and maternity benefit of Rs 6,000 to unorganised workers is something that other states could emulate.
 
What is required is a collective acknowledgement of the contribution of the unorganised/unprotected workers to the national income (estimated at close to 60 per cent) and its likely enhancement when their basic insecurities are addressed. As a nation, we need to overcome our deep societal antipathy to the plight of the poor, who are almost wholly working poor. The agenda of inclusion should not be allowed to continue as mere rhetoric. A ten percent shining India enveloped by an 'area of darkness' of ninety per cent cannot coexist for long.
 
Gautam Bhardwaj,
Director, Invest India Economic Foundation

A similar scheme was tried in 50 districts as a pilot, and the membership peaked at a few thousand before falling to single digits!
 
Over 300 million unorganised sector workers in India can perhaps march towards their retirement with greater confidence, since the may soon have company in Parliament in the form of the Unorganised Workers Social Security (UWSS) Bill 2007. Though both Bills share a common goal of delivering broad-based old age income security, their approach to achieving this outcome is remarkably different. The PFRDA Bill seeks to deliver retirement incomes to workers who have the financial capacity to save for their retirement and is based on a well thought through nuts-and-bolts institutional architecture with sound administrative arrangements. Enormous effort has gone into designing transactional mechanisms which will work under Indian conditions when implemented nationwide. The UWSS Bill, on the other hand, reveals a hazy proposal for delivering a universal social security benefit using gigantic government-run welfare programs "" an approach that has been tried before, both in India and abroad, and failed for many decades.
 
An identical scheme with a similar title, also managed by the labour ministry and also targeting the unorganised sector workforce was launched before the last general elections. It was flagged off in 2003 across 50 districts on a 'pilot' basis. Membership peaked at a few thousand workers before it dwindled to single digit coverage within weeks as it was impossible to get workers who earned little, irregularly, and often migrated, to contribute to a pension plan, day after day, week after week, month after month ... It was recently put to rest.
 
It may be useful to study this before we embark on yet another attempt at implementing a highly complex universal social security scheme targeting over 300 million unorganised sector workers. We should also ask whether taxpayers can really afford a population-wide social security?
 
A fundamental flaw in the UWSS approach is that it assumes that the unorganised sector is a homogeneous mass of destitute manual labourers. In reality, the 300 million workers in this sector are a very heterogeneous group, ranging from doctors to accountants to mechanised farmers to head-loaders to self-employed shopkeepers. In this context, a one-size-fits-all approach to universal social security may be misplaced. For instance, data from the finance ministry's Indian Retirement Earnings and Savings (IRES) Survey 2004 suggests that roughly 54 million (or 15 per cent) of the unorganised sector workers have both the interest and financial capacity to be able to save for an above-poverty pension. The PFRDA Bill is well geared to meet this demand and no subsidies are needed to be directed at this population through the UWSS Bill. This data reveals that another 120 million workers are already interested in saving for their retirement. However, even with regular contributions over multiple decades, many of them may not be able to save enough for an above-poverty pension. It is possible to visualise linking the thousands of MFIs, cooperatives and SHGs to the PFRDA architecture to deliver a targeted and well regulated pension co-contribution for this population "" in order to 'top-up' their benefits and motivate sustained voluntary contributions.
 
We are therefore left with a population of 125 million workers for whom the PFRDA Bill will not work. These include the lifetime poor and those already nearing retirement. For them, instead of yet another attempt at providing pensions by building new government machinery, it may be easier to fix the existing administrative gaps in the National Old Age Pension Scheme (NOAPS) to deliver a more adequate means-tested old age pension to the destitute elderly. While it is difficult to fault the government's concerns on social security, it is imperative that it does not translate into yet another non-starter scheme or an unsustainable fiscal crisis. The best way forward involves using the PFRDA Bill to shrink the potential population of the destitute old and fix the capacity to deliver a meaningful NOAPS. But for this to happen, the government needs to urgently get its Act together on the PFRDA Bill. And avoid the taking a giant step in the wrong direction with the UWSS in its current shape.

 
 

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Will the social security bill deliver on pensions?

DEBATE

With the Unorganised Sectors Social Security Bill likely to be introduced in the budget session, the viability of the scheme becomes important.
With the likely to be introduced in the budget session, the viability of the scheme becomes important.
 
K P Kannan,
Member, National Commission for
Enterprises in the Unorganised Sector

Providing a minimum social security to 300 million workers costs less than a lot of other existing schemes such as the tax benefits to SEZs
 
The proposed in May 2006 that a national minimum social security be provided to around 300 million unorganised (who are also unprotected) workers in this country. Accordingly, a bill is now under the active consideration of the government. So far, no one has really opposed the need for some social security to these workers who constitute more than 90 per cent of the workforce. Despite such a broad consensus in principle, there has been much delay "" 60 years to be specific "" in providing even a minimum social security cover to take care of the contingencies of these working poor. The current hinges perhaps on the financial cost to the government.
 
In my view, too much is being made out of the financial implications. The ultimate cost to the government (both central and state) is likely to be around Rs 25,000 crore or half-a-percent of the GDP when all the workers are covered. This could be done either over a period of five years or seven years because coverage depends on the registration of workers to the social security system. As such, the ultimate cost is a conditional one. Even compared to many other large schemes such as the Integrated Child Development or the National Rural Employment Guarantee Act, the proposed national minimum social security involves much lower financial costs.
 
Or, for example, compare the ultimate cost of this scheme to the incremental cost to the central government when the Sixth Pay Commission gives its recommendations. This is likely to be in the range of Rs 25,000 crore to Rs 40,000 crore per annum. Or take the case of SEZs, which could, as reports go, deprive the central government of revenues close to Rs 100,000 crore per annum! We need to ponder whether we have our priorities right.
 
But the attractive part of this scheme, compared to the examples cited above, is that the government is in a position to recoup part of the costs by way of a tax or cess on industry and services or a class of employers. This is because employer contributions have to be paid upfront by the government due to a number of factors including absence of visible employers for a sizeable section of the unorganised workers (for instance, street vendors and home-based workers) or multiplicity of employers for some others (such as casual wage workers).
 
What is important, in fact crucial, is the organisational challenge that includes the enforcement mechanism. The proposed national minimum social security is a package consisting of health benefits including maternity, life insurance, and old age security in the form of a monthly pension to the poor and provident fund to others. To enforce this package, a national social security board and state level boards are proposed. The state boards are the real implementers. The national minimum is the floor level social security applicable to all unorganised workers throughout the country. States could, and in fact should, add on to it by either enhancing the benefits or adding new benefits. In fact, states such as Kerala and Tamil Nadu are the real trail blazers. The recent decision of the Tamil Nadu government to pay a monthly pension of Rs 500 and maternity benefit of Rs 6,000 to unorganised workers is something that other states could emulate.
 
What is required is a collective acknowledgement of the contribution of the unorganised/unprotected workers to the national income (estimated at close to 60 per cent) and its likely enhancement when their basic insecurities are addressed. As a nation, we need to overcome our deep societal antipathy to the plight of the poor, who are almost wholly working poor. The agenda of inclusion should not be allowed to continue as mere rhetoric. A ten percent shining India enveloped by an 'area of darkness' of ninety per cent cannot coexist for long.
 
Gautam Bhardwaj,
Director, Invest India Economic Foundation

A similar scheme was tried in 50 districts as a pilot, and the membership peaked at a few thousand before falling to single digits!
 
Over 300 million unorganised sector workers in India can perhaps march towards their retirement with greater confidence, since the may soon have company in Parliament in the form of the Unorganised Workers Social Security (UWSS) Bill 2007. Though both Bills share a common goal of delivering broad-based old age income security, their approach to achieving this outcome is remarkably different. The PFRDA Bill seeks to deliver retirement incomes to workers who have the financial capacity to save for their retirement and is based on a well thought through nuts-and-bolts institutional architecture with sound administrative arrangements. Enormous effort has gone into designing transactional mechanisms which will work under Indian conditions when implemented nationwide. The UWSS Bill, on the other hand, reveals a hazy proposal for delivering a universal social security benefit using gigantic government-run welfare programs "" an approach that has been tried before, both in India and abroad, and failed for many decades.
 
An identical scheme with a similar title, also managed by the labour ministry and also targeting the unorganised sector workforce was launched before the last general elections. It was flagged off in 2003 across 50 districts on a 'pilot' basis. Membership peaked at a few thousand workers before it dwindled to single digit coverage within weeks as it was impossible to get workers who earned little, irregularly, and often migrated, to contribute to a pension plan, day after day, week after week, month after month ... It was recently put to rest.
 
It may be useful to study this before we embark on yet another attempt at implementing a highly complex universal social security scheme targeting over 300 million unorganised sector workers. We should also ask whether taxpayers can really afford a population-wide social security?
 
A fundamental flaw in the UWSS approach is that it assumes that the unorganised sector is a homogeneous mass of destitute manual labourers. In reality, the 300 million workers in this sector are a very heterogeneous group, ranging from doctors to accountants to mechanised farmers to head-loaders to self-employed shopkeepers. In this context, a one-size-fits-all approach to universal social security may be misplaced. For instance, data from the finance ministry's Indian Retirement Earnings and Savings (IRES) Survey 2004 suggests that roughly 54 million (or 15 per cent) of the unorganised sector workers have both the interest and financial capacity to be able to save for an above-poverty pension. The PFRDA Bill is well geared to meet this demand and no subsidies are needed to be directed at this population through the UWSS Bill. This data reveals that another 120 million workers are already interested in saving for their retirement. However, even with regular contributions over multiple decades, many of them may not be able to save enough for an above-poverty pension. It is possible to visualise linking the thousands of MFIs, cooperatives and SHGs to the PFRDA architecture to deliver a targeted and well regulated pension co-contribution for this population "" in order to 'top-up' their benefits and motivate sustained voluntary contributions.
 
We are therefore left with a population of 125 million workers for whom the PFRDA Bill will not work. These include the lifetime poor and those already nearing retirement. For them, instead of yet another attempt at providing pensions by building new government machinery, it may be easier to fix the existing administrative gaps in the National Old Age Pension Scheme (NOAPS) to deliver a more adequate means-tested old age pension to the destitute elderly. While it is difficult to fault the government's concerns on social security, it is imperative that it does not translate into yet another non-starter scheme or an unsustainable fiscal crisis. The best way forward involves using the PFRDA Bill to shrink the potential population of the destitute old and fix the capacity to deliver a meaningful NOAPS. But for this to happen, the government needs to urgently get its Act together on the PFRDA Bill. And avoid the taking a giant step in the wrong direction with the UWSS in its current shape.

 
 
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