Amidst much fanfare, the incumbent government announced the contribution-based Social Security Scheme that aimed to cover nearly 3.5 million formal private sector workers by requiring them and their employers to contribute to the Social Security Fund (SSF). The Ministry of Labor, Employment and Social Security affirmed that this scheme is to put an end to the financial insecurity for the present and uncertainty for the future of private workers. Nevertheless, this initial euphoria has not sustained as the scheme has not been able to rope in the intended number of employees in the private sector. So why is there such a lukewarm response in part of the private workers to participate in the scheme?
While umpteen questions and insecurities around the scheme have been floated, the debate regarding the unequal treatment of civil servants and private employees is one of the principal causes for this seemingly high reluctance.
A year after the contribution based Social Security Act was enacted, the Pension Funds Act was enforced detailing the provisions relating to the contribution-based scheme for civil servants. A comprehensive review of both the Acts evinced that there exist stark disparities between the stipulated provisions and the benefits availed to both parties. The first one being, the mandate of a contribution of 11 percent to be made by the private employee as opposed to only 6 percent by the civil servants.
Of which, the primary difference arises out of the manner in which the monthly installment to be received after retirement is calculated. In case of private employees, the total contribution plus the interest rate is divided by 180, whereas in case of their civil servant counterparts this amount is calculated by multiplying the amount of last drawn salary by total number of years in service and dividing such amount by 50. This effectively means that civil servants will receive a higher amount of monthly installment of the pension fund even when their contribution rate is only 6 percent.
Moreover, the contribution based Social Security Act does not lay down the rate of return/interest that the contributed fund will accrue upon retirement. To top it off, the amount in the fund is not automatically adjusted for inflation; rather the Board is given the discretionary power to decide both the need and the rate with no guarantee whether the fund will provide returns, if at all, during maturity. As compared to this, civil servants are provided with an increment of 10 percent every three years in order to adjust for inflation.
Likewise, the overall fund that is deposited into the SSF by a private employee is not channeled into productive assets; only 20 percent of the total fund is invested while the remaining 80 percent is kept idle. On the contrary, pursuant to the Pension Fund Act, an account balance equivalent to three years of the pension amount must be maintained in the fund for civil servants while the remainder amount is invested to give sizable and attractive returns.
Furthermore, in the event of death of a contributor from the private sector, the spouse is entitled to a lifetime pension benefit that is equivalent to 50% of the pension amount provided that such person has no alternative source of income and has not remarried. The same holds true for the civil servants, with the difference being, whether the spouse has an alternative source of employment and subsequent income is not a factor that is considered. Moreover, there is no provision wherein anyone other than the spouse is entitled to the pension arrears on account of death of a private employee. As the beneficiary is only limited to the spouse, this clause overlooks and omits others, those who are financially dependent on the contributor. Conversely, a civil servant is allowed to appoint a nominee.
Another difference exists in accordance to the outlined criteria to qualify for the receipt of the pension amount. A private employee should have completed the age of 60 and should have contributed for at least 180 months or 15 years so as to be eligible for pension entitlement. Whereas, a civil servant who has retired from service after completing a service term of 20 years or more will be receive the pension benefit. In alignment with the same, the Labor Act mandates the retirement age to be 58 years and as a consequence, the private employees will be unable to incur benefits for two years i.e. until they reach the age threshold.
Hence, the diversity between the schemes has generated much debate around its equity. Beyond the obvious structural variations between the private and the public sector, the aforementioned reflections have risen the issue of comprehensibility and transparency that legislators intend to give to the social security scheme.
– This article was originally publised by Ankshita Chaudhary in The Himalayan Times on February 2, 2020.