The fidgety pursuit of a pensioned society

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The broader idea behind successive Budgets of this government has been to cast the pension net wider, but tardy follow through has marred the process even as 82 per cent of the workforce is still stuck with informal jobs. The shifting stance over taxing provident fund savings only illustrates the lack of a clear road map.

Budget speeches are not just a tool to signal a government’s priorities for the year ahead and the not-too-foreseeable future, but also a mechanism to move attention away from past promises with newer, presumably catchier ones — usually without explaining why the earlier ideas didn’t work out.

Finance Minister Arun Jaitley’s 2016-17 Budget speech aimed to signal the government’s commitment to the weakest sections of society, but all of that has been hijacked by the brouhaha over the tax he introduced on provident fund savings. With the National Democratic Alliance’s (NDA) allies, trade unions and even Cabinet ministers revolting instantly against the idea, North Block has been scrambling to generate alternative narratives on the move. This was most stark on the first day after the Budget, by when the Prime Minister’s Office had sought an explanation on the issue and at least three different versions on how the tax would be implemented were put forth by the Finance Ministry’s top officials.

So what drove the government and, more specifically, Finance Ministry mandarins to paint themselves into a corner like this? Cuing back to the NDA’s previous two Budgets may provide a clue to whether it’s amnesia, dogged pursuit of an unfulfilled goal, or a bit of both, that is to blame for the current mess.

Welfare of Senior Citizens: 2014-15

This was the subhead Mr. Jaitley used for three paragraphs relating to social security in his maiden Budget presented for nine months of the year. He began by offering a limited revival of the Varishtha Pension Bima Yojana (VPBY) that was started by the Atal Bihari Vajpayee regime well over a decade ago.

He then set his eyes on the ‘large amount of money’ lying as unclaimed amounts in Public Provident Fund, post office saving schemes and other such accounts. “I propose to set up a committee to examine how this amount can be used to protect and further financial interests of the senior citizens,” he said, setting a stiff six-month deadline for it. In those six months, the committee met just twice.

Mr. Jaitley also asserted the newly elected NDA government’s commitment to the social security and welfare of employees serving in the organised sector. To prove this, it extended a minimum pension of Rs.1,000 for all members of the employees’ pension scheme run by the Employees’ Provident Fund Organisation (EPFO). It also raised the wage ceiling for mandatory Employees’ Pension Scheme (EPS) membership from Rs.6,500 per month to Rs.15,000 per month.

An EPF account is mandatory for all employees earning up to Rs.15,000 per month in firms employing over 20 workers. As per the law, 24 per cent of an employee’s salary (12 per cent as employee’s share and 12 per cent as employer’s share) is contributed to EPFO as a social security net for old age — a little over a third of that (8.33 per cent) is diverted to the EPS, with the government chipping in with a 1.16 per cent subsidy.

The Finance Ministry should have known about this pension scheme — it provides for it every year and put in an additional Rs.250 crore that year. But consider what Minister of State for Finance Jayant Sinha said when questioned about one of the narratives floated by the Finance Ministry to dodge the EPF tax backlash. The ministry has said that EPF savings will remain tax-free if three-fifths of the corpus is used to buy an annuity and get a monthly pension. “Does every EPF account have a pension component?” he asked this week in response to a query on why EPF members need to have two pensions.

Jan-Dhan to Jan Suraksha: 2015-16

The number of paragraphs devoted to social security went up to seven in Mr. Jaitley’s second Budget as he announced three new schemes as part of the government’s commitment “that no Indian citizen will have to worry about illness, accidents, or penury in old age”. “Worryingly, as our young population ages, it is also going to be pensionless. Encouraged by the success of the Pradhan Mantri Jan-Dhan Yojana, I propose to work towards creating a universal social security system for all Indians, especially the poor and the underprivileged,” the Finance Minister said.

The schemes he unveiled: a Pradhan Mantri Suraksha Bima Yojana (accidental death cover of Rs.2 lakh at Rs.12 premium a year), an Atal Pension Yojana that would give a fixed pension (with a limited co-contribution up to Rs.1,000 from the government), the Pradhan Mantri Jeevan Jyoti Bima Yojana (natural and accidental death risk cover of Rs.2 lakh at Rs.330 premium a year) and a scheme for providing physical aids and assisted living devices for senior citizens living below the poverty line.

It is not clear if the committee on unclaimed deposits he had set up in the previous Budget had given its report, but the Finance Minister returned to the theme and said about Rs.9,000 crore lying unclaimed in PPF and EPF accounts would be ‘appropriated’ to a new Senior Citizen Welfare Fund.

Rules for Senior Citizen Welfare Fund have been finalised, the Budget 2016-17 documents say. However, the idea of forfeiting unclaimed savings of people has not passed legal muster as it would violate the fiduciary trust vested by investors in the trustees of these funds.

Mr. Jaitley also remarked that both EPF and Employees’ State Insurance Corporation (ESIC, that provides medical care to organised sector workers) have “hostages, rather than clients” and workers with low incomes suffer on account of high statutory deductions to such schemes. He promised to provide employees the option to leave the EPF and opt for the New Pension Scheme (NPS) launched by the Pension Fund Regulatory and Development Authority (PFRDA). He also said that employees below a certain level of monthly income could decide if they wanted to stop their own contributions (12 per cent of salary) to the EPF. He offered a similar option for workers to opt for a health insurance product instead of ESI.

For NPS, an additional tax sop of Rs.50,000 was given for investments beyond Rs.1.5 lakh that are tax deductible under Section 80C of the Income Tax Act; 2.8 million new members joined the scheme, partly driven by this move, taking its corpus to Rs.1.10 lakh crore from 11.5 million accounts, said PFRDA Chairman Hemant Contractor.

Meanwhile, the Law Ministry is still vetting the legislation to amend the EPF Act of 1952, while a draft Cabinet note is doing the rounds on amending the ESI Act of 1948. So these announcements remain non-starters as of now.

Towards a pensioned society

The latest Budget made a pensioned society one of the nine new pillars for growth, but devoted just five unusual paras with 188 words that reflect the circuitous route the NDA is taking on social security, partly driven by amnesia and the failure to meet its previous Budget’s pursuit to make the country’s largest retirement fund (with Rs.10 lakh crore) unattractive. It levied a tax on EPF savings (run by the Labour Ministry) in order to make the NPS (promoted by the Finance Ministry) even more attractive.

“We are so obsessed with the semantics of such inconsequential and immaterial things that the big picture is always lost sight of. And the big picture is most Indians don’t have any social security to speak of, be it pension or health care,” points out Amit Gopal, senior vice president at India Life Capital, adding that it is rare for a Budget social security promise to be effective as there is never a system-wide view.

If EPF savings are to be taxed, the same rules should apply for PPF and government employees’ PF for true parity in tax treatment that leads to seamless choices. A lot has been and will be said in the coming days on this till the Prime Minister takes a final call on the fate of the EPF tax. A recently retired Central Provident Fund Commissioner, however, suggests a smarter alternative to avoid such fracas. “Instead of these NPS vs EPFO games, just bring the EPFO under the Finance Ministry as well and take a fresh look at how to ensure pensions for those who have no formal employment contracts and access to either of the two schemes,” he says, referring to 82 per cent of the workforce that still gets by with informal and vulnerable jobs.

The Economic Survey for 2015-16 talked about creating good jobs for the country’s youth, by rationalising the statutory deductions from salaries (like EPF) that hit take-home salaries and force people to opt for non-formal employment even in the organised sector. The Finance Minister’s previous Budget already said a start would be made on this by making employee PF contributions optional. Implementing that would have delivered more goodwill for the NDA, while spurring up domestic demand. Instead, a fractious debate diverts attention from a fragmented social security system that only focuses on a little over 10 per cent of the workforce, and blue-sky promises from the past remain buried in red tape.

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