Let’s Expand Social Security: Provident Fund Reforms Are Vital For India

India’s successful transition of subsidy spending for 100 million citizens to direct benefit transfers exemplifies progress in social security. However, the stagnant trade union movement, favouring job preservation over innovation and youth employment, has hindered effective work-linked social security programs, resulting in minimal contributions from a vast labour force. To tackle this issue and promote formalisation, five crucial reforms for the Employee Provident Fund Organization (EPFO) are proposed around efficiency, choice, competition, effectiveness and sustainability that would shift an estimated 50 million people from informal to formal work.

• Efficiency: The EPFO operates as an expensive mutual fund, burdening employers with high costs. To address this, it should transform into a non-profit entity with benchmarked costs, overcoming the monopoly-driven cost disease.

• Competition: Monopolies like the EPFO and Employees’ State Insurance limit choices and foster inefficiencies. Introducing competition and allowing employee choice in contribution schemes can improve services and reduce costs.

• Choice: Employees should have autonomy over their contributions, including the option to opt-out of certain deductions, promoting fairness and empowering individuals to manage their finances effectively.

• Effectiveness: Shifting from employer-centric to employee-centric record-keeping, such as linking contributions to Aadhaar numbers, enhances portability and accessibility, benefiting gig workers and self-employed individuals.

• Sustainability: The EPS diverts 8.33% of a subscriber’s salary to a defined-benefit plan. But the EPS has a birth defect; pension contributions or pension benefits can be fixed, but the EPS fixes both. 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.

Manish Sabharwal, Vice Chairman, and Kartik Narayan, CEO – Staffing at TeamLease Services Limited, offer perspectives on a five-point agenda to fix the country’s PF scheme that could shift 50 million people from informal to formal work.

The expert opinion titled  “Let’s Expand Social Security: Provident Fund Reforms are Vital for India” was first published in mint.