A joint byline by – Manish Sabharwal and Sonal Arora; published in Mint: http://goo.gl/6AhFq5
The Provident Fund Organisation’s cadre restructuring will cost Rs2,000 crore and represents a massive abuse of its monopoly.
The eliminating of EPFO’s monopoly, however difficult, is the right thing to do for social security, formal employment, and employee welfare.
Is the monopoly of the Employees’ Provident Fund Organisation (EPFO) something painful but necessary like a root canal treatment, or painful and unnecessary—like being hit with a hammer on the head? EPFO is surely a painful hammer because of its high costs (it is the world’s most expensive government securities mutual fund and charges 3.5% of contributions as administrative charges), poor service (half of its accounts are orphaned because it has hostages rather than clients and withdrawal or transfer is painful), and atrocious design (it links account balances to employers rather than employees). A little noticed cadre restructuring approved by EPFO last month will add aboutRs.2,000 crore to its costs. EPFO not only camouflages self-interest as national interest (about 73% of its costs already go to past and present employees) but it is incompetent, inefficient, ineffective and, at the bottom of the pyramid, often corrupt. We’d like to make the case that ending EPFO’s monopoly is an idea whose time has come.
An objective review of our provident fund system will unearth many birth defects. How can workers live on half their salary and be forced to save 45% of their salary when the savings rate for people with incomes below Rs.15,000 per month is close to zero? Salary belongs to workers, so shouldn’t workers decide who handles their money? Shouldn’t the roles of regulators, policy makers or service providers be separated? Should provident fund be tax-free at all stages (contribution, accumulation and payout) for high wage workers voluntarily participating in the scheme? Why does the provident fund department have more than 50 million dormant accounts? In an age of cloud services and Aadhaar authentication, should a worker be required to submit claim forms in the office where he last worked? Wouldn’t the adoption of big data analytics lead to better compliance under Section 7A of the Act (inspections and enquiry procedures) rather than more offices and people?
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.
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