Turn the provident fund flexible
Reports suggest that the Social Security Code Bill expected to be tabled in Indian Parliament this week may allow employees to contribute less to their employee provident fund (EPF), thus leaving a larger part of their monthly pay in their wallets. This is being seen as part of the government’s efforts to bump up consumption in order to pull the economy out of a demand slump. But expecting workers to spend more now at the cost of their savings pool may not play to the script.
For one, the lower employee contribution reportedly under consideration is not significant enough. Then, the structure of the EPF is such that most of the gains will accrue to a relatively small number at the top of its pyramid. Finally, relaxing the rules for only a section of workers—say, those working in small enterprises—would deny them the social security assured to their counterparts in larger enterprises. These workers are most in need of a security net.
Yet, the proposal could be justified if it grants employees greater choice over their retirement savings. They could be asked what portion of their salary—given a set of two or three options—they’d like put away for retirement. While EPF savings are compulsory for formal sector workers, the scheme also offers a higher rate of interest than banks fixed deposits and the like, so some workers would be tempted to save more, while others prefer to spend as much as possible. India also has a state-run voluntary fund in the form of its National Pension Scheme, which lets people decide how much to invest for what kind of old-age benefits. But it is not very popular. A suggestion to let EPF subscribers shift their corpus to the NPS was opposed by trade unions. Let’s turn the EPF flexible instead.