Pension Reforms in India: Myth, Reality and Policy Choices

Escalating costs of the pension system is forcing the Indian Government to reevaluate the formal programmes that provide social security to employees. The government has so far received three official reports (namely, OASIS, IRDA and Bhattacharya), which have examined the issue and suggested several measures to provide a safety net to the aging population. This paper examines the recommendations made in these reports and analyses the potential effects of them. It is organized around five policy questions: 1. Should the reformed system create individual (funded defined-contribution) accounts, or should it remain a single collective fund with a defined-benefit formula? The changeover involves a larger public policy choice issue: who should ultimately bear the risk? Should employees/retirees shoulder those risks alone arising from variations in asset yields and unexpected changes in longevity, or should these risks be shared more broadly across participants, if not society? Choice would depend upon to which group the individual belongs. Financially successful people may believe in individual ownership and choice, while low wage earners may want assured returns because they do not have other resources to fall back upon. Unfortunately most Indians, unlike those in many other countries, are in the latter category which cannot bear any risk, more so in the old age. 2. If individual accounts are adopted, should the reformed system move toward private and decentralized collection of contributions, management of investments, and payment of annuities, or should these functions be administered by a public agency? In privately managed funds, associated problems would be intermediation costs, agency problem (principal-agent fiduciary relationship), and greatly increased costs to administer the plan. Several studies across the world have shown that periodic fee may look deceptively low but, over longer time horizons, the cumulative effect can be dramatic, sometimes reducing the benefits by 30 to 50 per cent. 3. Should fund managers of retirement savings be allowed to invest in a diversified portfolio that includes stocks and private bonds? In recent years equity investments, particularly index investing, have become a favoured strategy. Index funds are subject to tracking error, and being loaded with few big stocks, there are much higher risks in index investing than people perceive. Over the period, real annual return on index funds may be more, but people retire only once. Equity markets are highly volatile and go through long periods of feasts and famine. Guarantees would have to be provided in the form of minimum return or providing minimum basic pension on retirement. World bank studies show that government ends up acquiring conjectural liabilities wherever a pension system based on private providers is mandated. How would that be different from the present system where a government agency (EPFO) provides retirement benefits? 4. Should the government move toward advance funding of its pension obligations for its employees, or should these obligations continue to be financed on pay-as-you-go basis? Studies have shown that a simultaneous implementation of funded, diversified, individual accounts is not a "free lunch" once you properly account for existing unfounded obligations and risk. The Bhattacharya Committees estimates show that the government would have to pay out more on account of pensions to its employees for the next 38 years before the new scheme starts showing reduced government expenditure. These amounts do not include the tax foregone by the government on the employees contribution. Several assumptions have been made about the scheme, which the committee hopes would remain valid and that the future governments would behave responsibly. The proposed scheme does not consider intermediation costs and agency risks; in fact, the committee presumes that agents would behave more responsibly than principals. 5. What should be the level of government fiscal support in the form of tax subsidy, foregone tax collections, grants, administrative costs incurred by its agencies, and level of assumed contingent liabilities in case the government guarantees minimum pension? The crucial question is: how much and to whom is this subsidy accruing? Are beneficiaries of the proposed system the ones who need subsidy? Tax treatment of pension is a critical policy choice. A generous tax treatment may promote savings but may be costly in terms of revenue foregone. Apparently, an exercise in balancing is necessary. The priority should, therefore, be putting in place a policy vision and road map with specific goals in relation to pre-determined milestones. These should include a tax financed and means-tested system for lower income groups. If government cannot afford it, then it has no moral or political justification to even consider providing further tax benefits to privileged income groups. If there are no government funds for the first pillar in the World Bank recommended multipillar system, the third pillar should remain out of policy discussions. Emphasis should be on strengthening the second pillar. Suggested reforms neither enhance efficiency nor make the social security system more equitable. It would only privatize the gains while costs and risk for the government would increase considerably. It would only help well-off segment of society in availing more tax concessions. Present problem in the government pension system is due to successive governments behaving like Santa Clauses ignoring the cost to exchequer. Fund managers would not be able to solve these problems. Specific fiscal and other measures for implementing a feasible and viable pension system in Indian conditions have also been suggested in the paper.

Economic security arrangements in the context of population ageing in India

The rapid ageing of India's population, in conjunction with migration out of rural areas and the continued concentration of the working population in the informal sector, has highlighted the need for better economic security arrangements for the elderly. Traditional family ties that have been key to ensuring a modicum of such security are beginning to fray, and increased longevity is making care of the elderly more expensive. As a result, the elderly are at increased risk of being poor or falling into poverty. In parallel with its efforts to address this issue, the Government of India and some of the Indian states have initiated an array of programmes for providing some level of access to health care or health insurance to the great majority of Indians who lack sufficient access. Formal-sector workers have greater social security than those in the informal sector, but they only represent a small share of the workforce. Women are particularly vulnerable to economic insecurity. India's experience offers some lessons for other countries. Although there is space for private initiatives in the social security arena, it is clear that most such efforts will need to be tax-financed. The role that private providers can play is substantial, even when most funding comes from public sources, but such activity will face greater challenges as more individuals seek benefits. India has also shown that implementation can often be carried out well by states using central government funds, with a set of advantages and disadvantages that such decentralization brings. Finally, India's experience with implementation can offer guidance on issues such as targeting, the use of information technology in social security systems, and human resource management.old age risk, old age benefit, medical care, social security administration, demographic aspect, India

Civil service and military pensions in India

This paper describes the New Pension System (NPS), an individual account defined contribution pension scheme introduced for civil servants in India, and the problems faced in implementation of this system. We describe what has been achieved in the implementation of the NPS, and the challenges ahead. We also document the state of military pensions which have not been a part of the reform process.

Demographic Ageing and Employment in India

[Excerpt] This study by Irudaya Rajan brings to light the current and emerging issues concerning the implications of demographic change on the labour market in India. While population ageing is a major achievement of our times it presents major challenges for the world of work that need to be addressed. With 90 million persons over 60 years of age, India has the second largest population of older people in the world. Furthermore, between now and 2050 the Indian population over 60 years of age will almost quadruple. The low level of benefits and their limited coverage push large numbers of older people (particularly older women) to continue working in the informal economy. The combination of old-age, lack of access to decent work, poverty and exclusion is therefore of great concern. This India study discusses the main economic and labour market issues and implications related to population ageing in India, and presents an overview of current policy responses. Section 1 of the study describes the main current and future demographic trends. Section 2 analyses overall employment and labour market situation of the older persons. Section 3 focuses on the poverty incidence in the old age in urban and rural areas. Section 4 deals with the main challenges of the social security system and provides an overview of the current pension reform. Section 5 presents the two main national policies targeting older people in India. The final section puts forward main policy suggestions towards ensuring a secure and decent old age for the Indian population

Creation of a Single National ID: Challenges & Opportunities for India

A National ID for all citizens and residents of India has long being considered a critical necessity, albeit the related projects have been in pilot mode for the past several years and no distinct road ahead seems to be coming out. The government has been focusing on inclusive growth and has launched several schemes at different levels to facilitate the same. However, monitoring the execution of these schemes and understanding clearly if the targeted citizens actually have got benefited, would demand for substantial granularity of information and doing away with information bottlenecks. Interestingly, proper execution of the National ID project by the government can prove to be useful for execution of various schemes and projects as well as in accessing multiple government and private sector services. This paper focuses on the need for a single national identity system in India and its proposed execution which may actually be linked to citizen life cycle. The other aspects covered and analyzed include current Indian scenario, challenges, existing identification systems and loopholes in the existing systems. Major challenges seem to be coming from enrolments, technology platform choice and strategic design, corresponding policy and legal frameworks. The paper also discusses about international scenario of single national id projects undertaken in 27 countries across the globe to understand current status, adoption and usage. To reinforce the need for national ID, the existing IDs were analysed based on a scoring model considering various dimensions. Primary research was conducted, based on which it was found none of the existing IDs was able to satisfy as a National ID based on the scoring model. The proposed road map has been discussed in length i.e technology platform, smart card technology, legal and administrative framework, business model based on Private-Public Partnership (PPP) considering the mammoth and diverse population. A ranking matrix may be created to come up with a composite score for all districts based on various dimensions. The execution may be planned to be executed without asking Indians to stand in queue for one more ID and accelerating towards a more secured society and more importantly ensuring better delivery of Government services to citizens.

Leveraging Technology to Improve Public Service Delivery: A Case of Implementation of National Electronic Funds Transfer (NEFT) System in Employees Provident Fund Organization (EPFO), India

During the recent past, the governments across the countries have started deploying information and communication technologies to offer public services in a more efficient and effective manner. The implementation of e-governance projects in developing countries requires an altogether different approach as the challenge is to offer public services to all the citizens including those who are less technology savvy. It can be safely inferred that a technology solution implemented in some developed countries may not be simply replicated in a developing country, which has its own set of challenges. In this paper the implementation of National Electronic Fund Transfer (NEFT) in Employees’ Provident Fund Organization (EPFO), a government body in India has been taken as an illustration to exemplify the effective use of technology to improve the service delivery in public sphere. Keywords: e-government, e-governance, e-payment, EPFO, ICT, India, NEFT, Provident Fund, Public Services, Social Security

Financial Development in Emerging Markets: The Indian Experience

Financial markets that function well are crucial for the long-run economic growth of a country. This paper, in the first instance, looks at how the financial development of an economy can be measured. It then traces the financial development of India through the 1990s to the present, assessing the development of each segment of financial markets. In doing so, it highlights the dualistic development of the financial sector. Finally, the paper makes an attempt to offer an explanation of this dualistic development and proposes a road map for the future development of financial markets in India.financial development; india financial development; india financial sector; india financial markets; emerging market economies; india economic growth

Can India universalize social insurance before its demographic dividend ends? The principles and architecture for universalizing social security by 2030

As much as 91% of India’s workforce of 475 million is informal, lacking social insurance. The latest effort on social security is India’s Social Security Code 2020, which merges eight existing laws. The paper finds the Code wanting by comparing it with the principles that should guide social insurance for informal workers in India. Drawing on this analysis it then sets out proposals for what a social insurance system for India could look like. The roadmap to such reform is long drawn out and challenging given the size of the country, the immensity of its population, its diversity and the complexity of informality in the workforce. Nevertheless, the goal remains that over the next ten years, social insurance should cover the entire workforce, in accordance with ILO Conventions. The paper closes by estimating the fiscal cost of what is proposed, both to federal and state governments

Inductive Logical Query Answering in Knowledge Graphs

Formulating and answering logical queries is a standard communication interface for knowledge graphs (KGs). Alleviating the notorious incompleteness of real-world KGs, neural methods achieved impressive results in link prediction and complex query answering tasks by learning representations of entities, relations, and queries. Still, most existing query answering methods rely on transductive entity embeddings and cannot generalize to KGs containing new entities without retraining the entity embeddings. In this work, we study the inductive query answering task where inference is performed on a graph containing new entities with queries over both seen and unseen entities. To this end, we devise two mechanisms leveraging inductive node and relational structure representations powered by graph neural networks (GNNs). Experimentally, we show that inductive models are able to perform logical reasoning at inference time over unseen nodes generalizing to graphs up to 500% larger than training ones. Exploring the efficiency--effectiveness trade-off, we find the inductive relational structure representation method generally achieves higher performance, while the inductive node representation method is able to answer complex queries in the inference-only regime without any training on queries and scales to graphs of millions of nodes. Code is available at https://github.com/DeepGraphLearning/InductiveQE.Comment: Accepted at NeurIPS 202