Allow social security schemes for employees to survive post retirement
If the government intends to remove the mandatory 12% PF contribution, then it must introduce social security scheme for employees to survive after retirement
A media report captioned “Union budget may boost take-home salaries” published in The Hindu on Friday, sends out disturbing signals. According to the report, the Union Budget 2016-17 is likely to announce measures to put more money into the hands of employees with a monthly income up to a threshold, like Rs10,000 for instance, by doing away with their mandatory 12% contribution for provident fund (PF) savings. We will definitely have to wait for more details till 29 February 2016 on which day the Union Budget will be presented. Meanwhile, one cannot resist the temptation to caution stakeholders against the harm the proposed measure may do to a fairly good-working and acceptable social security arrangement that exists in the organised sector.
On the face of it, the proposal to discontinue recovery of provident fund contribution from wages of employees with low income, would appear a worker-friendly initiative, putting more money in the employees’ pockets. In effect, the move reduces the corpus intended to take care of the employee’s retired life by half. As there are no social security systems of the kind available in developed countries, workers in the organised sector are protected to some extent by their savings through PF contribution. It is cruel on the part of government to lure them by promise of more take-home pay by reducing their forced savings for a genuine purpose.
Such a gesture to reduce employees’ contribution should be made only where employers are able to compensate by increasing their contribution to PF to the extent employees’ contribution is reduced.
Ethically, smuggling such drastic measures through budget proposals, which get through without adequate informed discussion in compelling circumstances, should not be an option. This happened in the case of withdrawal of Defined Payment-based Pension Scheme, when New Pension Scheme (now National Pension System -NPS) was introduced sans legislative procedure. As the scheme was made applicable for employees who joined subsequently, no one noticed the harm inherent in the measure. NPS was deliberately excluded from the Terms of References of the VI and VII Central Pay Commissions (CPC). On receipt of a host of representations, VII CPC examined the NPS in some detail and the findings find a place in Chapter 10.3 of the Commission’s report.
Now the mistake in respect of NPS is likely to be repeated now in the case of employees PF Scheme. Legislative processes should not be skipped for administrative expediency or on grounds of political compulsions.
(MG Warrier  is former General Manager, RBI, Mumbai and author of the 2014 book "Banking, Reforms & Corruption: Development Issues in 21st Century India")
MG Warrier
6 years ago
The pedestrian apathy of elite readers to social security issues of low income group workers is evident from the fact that after over 800 page views, there is just one casual comment on this article. What more can one expect in a country where the Social Welfare Minister asks banks to give loans to citizens with no means to survive, for constructing toilets? The group of workers that will be affected, if government goes ahead with the move will be worse off than made out in this article clearly comes out from the following excerpts copied from an online comment posted by a reader Amit:
“The present rate of contributions for employees is 12% of only basic DA and not 24% as given in the caption. Further, out of 12% contributed by employer 8.33 is invested in pension fund, out of which employees receives his pension. The remaining 3.67% is added in employees' share of provident Fund. Thus, just by contributing 12% of a Employee gets 15.67% every in his account, which can be withdrawn by employee at the time of leaving the job. he can also withdraw for approved purposes like purchase of house, marriage of children, self in case of unmarried persions , medical treatment and higher education for children. Further employee's portion of PF earns interest. Currently, the rate of interest is 8.75% which is higher 8.5% earned in GPF by central Govt. Employees”.
6 years ago
Well the solution is simple. Give employees the option to opt-out of their 12% contribution. Forcing people to do anything including savings is never a good idea.

Those who are saavy enough to save for their retirement on their own will be able to better utilize the funds than EPFO is doing now. Infact the employer's 12% contribution is a total waste in its current incarnation as EPS does not get any interest.

I say give the employees option to opt-out of the entire 24% contribution and instead receive it as bonus to salary.
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