The Social Insecurity Debacle

This article was originally published by Ankshita Chaudhary in the Himalayan Times on December 22, 2019.

The newly rolled out contribution-based social security scheme is said to make Nepalese better off financially and lift millions out of poverty. More so, the scheme supposedly provides a foundation of financial security on which individuals can build a plan for contingencies of old age, disability, accidents, curative or preventive medical issues. Although these features combine to make the scheme look good on a superficial level, and therefore account for its political appeal; in essence, significant concerns that undergird social insecurity and injustice have been raised regarding the same. This article attempts to delve into some of the ensuing confusions, regarding the comprehensive welfare package, among the general masses.

While the implementation of the contribution-based social security scheme has ensured a safety net for wage workers, the employers in the private sector – particularly small and medium enterprises (SMEs) – are marred with mounting challenges in terms of sourcing funds for an expanded social security fund coverage. In Nepal, SMEs comprise a substantial part of the economic activity as they provide employment to 1.7 out of 3.4 million workers (employed formally) and contribute around 22% of the total GDP. Like any other form of enterprise, SMEs are subject to myriad of costs that range from administrative to operating expenses. Moreover, the government has instituted the minimum wage at NPR 13,450 to establish a living wage and protect workers against unduly low pay. To top it off, the contribution-based social security scheme stipulates that the employer has to contribute 20% of the employees’ basic monthly salary to the fund.

The introduction of this scheme puts a strain on SMEs that are already subject to tight liquidity. It not only increases the employers’ cost of production as they have to comply to the extra payroll costs but also makes it problematic for businesses to sustain labor-intensive businesses. Even though large businesses may find it easier to cope with the wage spike, this added cost may discourage existent SMEs to function and potential entrepreneurs to venture into the ecosystem. As employers find the cost of doing business too high, this may thrust them to slide into the informal sector for mere survival.

In order to offset this rising wage cost, employers may pay the nominal amount of minimum wage to the employees, start reducing their salary (in a manner that drives the net effect on part of the employer the same after paying 20 percent to the employee), or skimp their increments. At the very least, they may move to use other methods to hire people which will allow them to shy away from their obligations under the Act, for instance terming employment as consultation services, which will eventually affect the employees’ job security. Besides, it is highly likely of the employers to pass the impact of their contributions to the consumers. This tendency can result in the higher prices of goods and services in the market resulting in an increased rate of inflation.

Additionally, the social security fund accumulates monthly installments wherein an amount equivalent to 31% of an employee’s salary is deposited. As low or lower middle-income groups account for majority of the population in the country, on a financial level, they may rationally value spending a certain portion of their income today regardless of how much that money may be worth decades in the future. For these aforesaid individuals, being forced to forego spending that money today represents a loss, irrespective of any future ‘return’. Hence, contributing one-third of their monthly income translates into decreased amount of money for consumption and erosion of their purchasing capacity. With the already low level of per capita wage for majority of workers in the country, this reduced consumption capacity indicates hardships they have to face presently for the benefits in a distant future, if any.

Similarly, the Act does not lay down the rate of return that the contribution in the fund will accrue upon retirement; hence, those who enroll in the scheme will receive an anemic return on their investment assuming they receive any return at all. The Act also stipulates that rate of inflation will be prescribed by the Board which further defies the concept of time value of money for the contributor. In both cases, the poor rate of return signifies that the retirement benefits will be far lower than if it had been available to channel the savings into productive assets.

These are few among the many reasons as to why employers and employees alike are seemingly resistant to participate in the present array of handouts under the ‘welfare banner’. Admittedly, we can argue about all kinds of reforms and changes to prop this program up, but all said cases substantiate the claims of those who interpret this scheme as a complete debacle.