On Expanding Social Security

Source: This post on Expanding Social Security has been created based on the article “We must expand social security” published in “Live Mint” on 22^nd January 2024.

UPSC Syllabus Topic: GS Paper 2 Social Justice – Issues relating to development and management of Social Sector.

News: The article discusses the issues with the work-linked social security program in India and suggests steps to reform the same.

According to the author, India’s work-linked social security programs suffer from high costs, low competition and excessive deductions.

As a result, only 1 millions of our 63 million enterprises and about 7.5% of our 550 million labor force are part of these social security programs (in the form of making contributions).

How can the EPFO be reformed to ensure formalization of labor force?

According to the author, the following 5 reforms for the Employee Provident Fund Organization (EPFO) would shift an estimated 50 million people from informal to formal work:

1) Efficiency: The EPFO is the world’s costliest government securities mutual fund, which leads to a high compliance burden on employers. Hence, EPFO should be a non-profit.

2) Competition: The EPFO and Employees’ State Insurance (ESI) monopoly on work-linked social-security payments has led to poor service), high costs and corruption demands, etc. Employees should be allowed a choice of paying their contributions to either the EPFO or public-sector National Pension Scheme (NPS).

3) Choice: Employees should get two choices: Whether to make any employee contribution at all (12% currently), and if so, opt out of the portion that goes to the defined-benefit Employee Pension Scheme (EPS) and contribute the sum fully to the core Employee Provident Fund (EFP) account.

4) Effectiveness: EPFO contributions can be linked to an Aadhaar number (of the employee), since employees work for multiple employers now. This will create traceability, portability and access, and enable EPFO products to be offered to self-employed and gig workers.

5) Sustainability: The EPS must be removed from the EPFO and merged with some universal and fiscally funded old-age security pension scheme like the Atal Pension Yojana. This is due to the EPS consisting of defined benefits (A defined contribution calculates pension based on the amount you contribute and returns the fund earns).

Note: Employee Pension Scheme (EPS): It is a social security scheme that was launched in 1995 by the EPFO. It makes provisions for pensions for employees in the organized sector after retirement at 58 years.

Question for practice:

How can the EPFO be reformed to ensure formalization of labor force and consequently, better social protection?