Squeezing hostages

The cadre restructuring has the usual whacky ideas; it revives the post of deputy provident fund commissioner (same work profile as assistant provident fund commissioner but with a higher grade pay), opens offices without adopting India Stack (paperless, presence-less and cashless,) and much else. Instead of a cadre restructuring, EPFO needs five changes: governance, competition, employee anchoring, tax restructuring, and an employee contribution review. Let’s look at each one in more detail. Governance is the most important because the Board of Trustees of EPFO is a geriatric ward that is not representative of today’s provident fund payers. If we applied the “prudent man” role of ERISA (the Employee Retirement Income Security Act of the US) then the current trustees of EPFO are guilty of gross negligence. A new governance structure would have a smaller board, term limits, and shift policy functions to the ministry of labour/finance and regulatory functions to PFRDA (Pension Fund Regulatory and Development Authority).

Competition is key; EPFO’s monopoly has made it fat and inefficient. Even if we don’t want private sector competition in the first phase, we must create the option for employees to pay their monthly contributions into the National Pension System. Employee anchoring is important because employment has shifted from being a lifetime contract to a taxicab relationship and benefits need to be linked to employees rather than employer so they are portable. An average 20-year-old is expected to have five jobs before she is 50. Employers should be required to pay monthly provident fund contributions into an account linked to the Aadhaar number of every employee.

The provident fund currently offers irrational tax advantages to high-wage employees; any employee with a salary of more than Rs.15,000 per month income should be subject to tax at the time of withdrawal for the period their income was more than the threshold. A contribution review is required because the current regime does not recognize that employee benefits in a cost-to-company world for salaries reduce take home salary rather than increasing gross salary. The new regime must recognize that low-wage employees, by definition, cannot be forced to save more than their savings. We must make the monthly employee contribution (12%) voluntary while the employer contribution to provident funds continues.

Productivity thrives on competition and monopolies create monsters. EPFO has become a monster with huge vested interests in its continuation and expansion. The eliminating of its monopoly, however difficult, is the right thing to do for social security, formal employment, and employee welfare. Hopefully, policy makers will weigh in on this battle of right against might.