Regressive step

Pensions should be decided by the executive, not courts

The Supreme Court has upheld a Kerala High Court judgment against the Employees’ Provident Fund Organisation (EPFO), as a consequence of which certain amendments to how pensions have been calculated will be struck down. This will create a situation in which those who had a particularly high previously drawn salary and several years of service might see their pension raised by as much as 1,000 per cent. This is naturally not in keeping with the ethos of the provident fund, which has always been scaled towards aiding the saving and retirement of those at the lower rung of the formal sector. The Court may well have upheld this regressive order, but the question is where the money to pay these much larger pensions will come from. That question has certainly not been taken into account by the court.

This appears to be an instance of legislative over-reach. The structure of the pension plan, the profitability and sustainability of the scheme, and so on, are questions that are properly determined by the executive. It is the executive that has to decide the proper distribution of subsidies and taxes — and support provided to state-guaranteed pension funds are nothing but a subset of that fiscal decision, which in all countries must remain with the executive. The executive, not the judiciary, is where the trade-offs that determine who benefits from guaranteed pensions should take place. For example, the EPFO system, which is limited essentially to employees in the formal sector, may not be considered the best form of savings, given the small size and disproportionate bargaining power of formal sector employment.

It is also entirely the executive’s decision to decide how tax revenue must be spent to ensure greatest justice as long as the fundamental rights are not being ignored. If the executive believes that pensions are a less effective use of tax revenue than, say, health care, that is the executive’s prerogative. Certainly, there are many Indian savings schemes open to the formal sector. On the other hand, health care is under-resourced, which hurts many older people. And employees who are outside the formal economy struggle to access proper savings schemes that are both state-guaranteed and provide a minimum return. This is part of the reason for the popularity of pyramid schemes and “chit funds”. The judiciary can naturally not take any of these important questions into account — which is why it is best to allow the executive to make this sort of decision.

It is worth noting that the government has already set up a better alternative to the EPFO, which is allowing for high-end savers, namely the National Pension Scheme (NPS). The EPFO accounts should have been migrated to the NPS. In order to ensure that pension schemes can pay for themselves in time, entitlements based on individual pay-ins, structured around retirement accounts, are a good idea. However, how can the government proceed with such much-needed reforms if the courts believe that they can step in to prevent them from being carried out? Rational analysis, and not arbitrary court orders, should decide what proportion of an employee’s earnings should mandatorily be saved.