Reinventing India’s Social Security Measures

Contributions from Peter Lindert’s book, ‘Making Social Spending Work’, suggest the necessity of safety nets in every society. Lindert reveals the universal challenge of providing practical social welfare to citizens and argues for the adoption of improved social security measures. A recent example of this involves India’s revamp of its societal welfare resources, targeting 100 million citizens through direct benefit transfers. However, the conversation surrounding the Employee Provident Fund Organization (EPFO) suggests several problems – lack of efficiency, limited choice, non-competitive behaviour, questionable effectiveness and sustainability. Thus, this article discusses five reform suggestions for a reimagined EPFO that could influence around 50 million people’s transition from informal to formal work. This change signifies a potential breakthrough for India, whose workforce struggles more with wage issues than job shortages.

Potential Successfulness of the Reforms

According to Lindert, countries employ different approaches towards public education, healthcare, pensions, and welfare, considering their philosophies on inter-generational inequality, fiscal redistribution, and human capital returns. He argues that social security becomes a reality only with fiscal capacity and many obstacles can obstruct it. He points out that India’s main issue lies within regulatory cholesterol. Hence, the following sections illustrate five flick-of-the-pen reforms that could accelerate India’s formality:

Efficiency

The current scheme of EPFO is considered the most expensive government securities mutual fund worldwide. Companies in India pay nearly tenfold the cost compared to an equivalent mutual fund from a bank, resulting in almost 4% of contributions for expenses. Instead, EPFO should adopt a model of being a non-profit entity with benchmarked costs, drawing from the economical habits of pension fund payments globally. Unfortunately, its current system suffers from Nobel Laureate Bill Baumol’s cost disease resulting from a monopoly benefiting the employers rather than the clients.

Competition

The monopoly of EPFO and Employees’ State Insurance (ESI) on work-linked social security payments has alarming consequences, creating lucrative prospects for informality over formality. Yet attempts to promote competition have been thwarted, with concerns about private sector exploitation and enforcement ineffectiveness. Those apprehensions should be counteracted by private sector provisions and granting the employees, not the employers, a choice of paying their contributions to either the EPFO or the public sector National Pension Scheme (NPS).

Choice

Employees should retain control over their salaries, including decisions on their deductions. Presently, the compulsory deductions tend to be higher for those with lower incomes, which could be inherently unfair. The proposed reform allows for the workers to decide whether to make any contribution, and if so, the option for them to invest fully into their core Employee Provident Fund (EFP) account becomes available.

Effectiveness

Given the shift in employment patterns, most employees now have multiple jobs, and some may freelance. To support this change and ensure traceability, portability, and access, EPFO’s contributions could be linked with an individual’s Aadhaar number. This move could also extend the reach of EPFO towards the self-employed and gig workers community.

Sustainability

The Employee Pension Scheme (EPS) could be another problematic area due to its defined-benefit plan, creating further issues with the recent court judgement. The proposed reform suggests removing the EPS from the EPFO to eliminate risks of ageing, inadequate investment income, and cross-subsidization that the organization currently struggles with.

Combining Idealism and Pragmatism

India’s first Prime Minister, Jawaharlal Nehru, believed in the country’s need for a welfare state dependent on increasing national income. He emphasized an economic policy that aimed at abundance. Therefore, it is essential for us to continuously develop wealth that will support fiscally financed safety nets and also initiate reforms of employer social security programmes. This could potentially lead an estimated 50 million current workers to transition from informality to formality.