Abstract
Ageing populations with increased life expectancy, low mortality rates, and decreasing
and volatile returns in financial markets have made old age financial security difficult.
Further, escalating costs of the pension system are forcing the Indian government to re-
evaluate its programmes providing social security to its 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 ageing
population. This paper examines the recommendations made in these reports and analyses the
potential effects of them. It is organized around five policy questions: Should the reformed system create individual (funded defined-contribution) accounts
or should it remain a single collective fund with a defined-benefit formula? The
policy issue is who bears the risk - individual or society collectively. If individual accounts are adopted, should public or private agencies administer
the reformed system? The issues that need to be resolved are: the magnitude of
intermediation costs, agency problem (principal-agent fiduciary relationship), and
the costs to administer the plan. Should fund managers of retirement savings be allowed to invest in a diversified
portfolio that includes shares and private bonds? Equity markets are highly volatile
and go through long periods of feasts and famine. Guarantees need to be provided in
the form of minimum return or providing minimum basic pension on retirement and the
bearer of these conjectural liabilities needs to be decided. 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? 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? The present problem in the government pension system is due to successive
governments behaving like Santa Clauses ignoring the cost to the exchequer. Mere
privatization would not be able to solve these problems.
An all-embracing pension reform is not possible overnight. Efforts should be made to find
ways of supporting new systems that may supplement existing systems. Suggested measures
include: A tax-financed and means-tested system for lower income groups. To build second pillar, continue publicly managed public system for people earning
less than Rs 6,500 a month; and for others who can bear the risk, appoint an
independent regulator to help develop and supervise private sector in offering risk-
return efficient pension products with tax subsidy already available under Section
B0CCC. There is no moral justification in India for providing tax benefits to privileged
groups to build third pillar. Government should refrain from frequent tinkering of
tax laws to benefit a few.
This paper also suggests specific fiscal and other measures for implementing a feasible and viable pension system in lndian conditions. For the present, the least that the government can do is to appoint an independent regulator who would also act as developer and make EPFO an independent agency having professional experts on its board.