Column: Stop pandering to just 5% of the workers

Feb 07 2014, 04:32 IST
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SummaryIt is economic insanity to try and fill a hole in the exisiting pension scheme by digging a bigger one

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 clients—rather, it has hostages, and that is why it runs the world’s 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

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