Fixing The Provident Fund System
In today’s DNA Mukul Asher & Amarendu Nandy argue that the Employees’ Provident Fund Organisation (EPFO) is ill-equipped to fulfil its mandate of providing retirement income security.
The EPFO is an unusual national provident fund in combining the features of a defined benefit scheme (Employees Pension Scheme or EPS, introduced in 1995) with those of a defined contribution scheme (Employee Provident Fund, or EPF) for its members. While the EPF balances can be withdrawn as a lump sum, the EPS is a pension scheme, with survivor benefits.The EPS scheme is badly designed, as it fixes (defines) both benefits and contributions. This is mathematically impossible. As the scheme parameters change over time, either benefit formula and/or contribution must be changed for financial sustainability. If both are fixed, the scheme cannot be sustainable. This is demonstrated by the reported under-funding of Rs 25,000 crore, equivalent to one-sixth of its total assets. Moreover, in the absence of reforms designed to match its long-term assets and liabilities, the under-funding is expected to grow rapidly.
Contrary to normal financial practices, the EPFO Board deliberates on the interest rate to be paid to members at the beginning rather than at the end of the financial year. The EPFO trustees, grossly neglecting their fiduciary responsibility towards members and the taxpayers, have been engaged in attempting to secure through political and administrative means higher interest rates for the members than what their unprofessional and uninformed investment policies permit the funds to earn. From a national point of view, budgetary support to EPFO is not likely to benefit the aam aadmi, as 85% of the members had balances of less than Rs 20,000, accounting for 17% of total balances.
…India’s stock market capitalisation exceeds $1 trillion. The depth and breadth of its financial and capital markets, which permit market-based efficient intermediation between savings and investments, are among India’s most important competitive strengths. That the board of trustees of India’s largest NBFI consciously refuses to utilise this competitive strength is astonishing. Even more astonishing is the argument made by trade union members of the board that such refusal is in the interest of the workers and the country. [DNA India]
Yes, The Indian govt. has to reformed from top to bottom. Same thing applies to administration, judiciary, police.
EPFO is white elephant, everybody knows that.
Nothing new here. Move on.
Comment by Anonymous — August 22, 2007 @ 10:36 am
Folks,
Please provide your insights on the topic rather than just posting a link.
Secondly, quoting such a huge amount of text from article can’t be called fair use.
Comment by Shashi — August 22, 2007 @ 12:11 pm
Shashi,
I suppose a good blog offers a balance of content—original insights plus links/extracts to relevant writing out there.
While what is “fair use” and what is not is not defined objectively, this extract has been published with the consent of the authors, and due attribution to the publication. Thanks for raising this though.
Comment by Nitin — August 22, 2007 @ 12:30 pm
Shashi, I have Greg Mankiw’s blog, the Becker-Posner blog, all economic blogs with a mix of borrowed content and original writing. While I agree we should have a mix, going by the evidence of various well-rated and respected blogs, posting published comment from elsewhere is considered acceptable. I think I agree with Nitin that we have not defined “fair use”.
Comment by little Ram — August 22, 2007 @ 8:51 pm
One possible way of making EPF more beneficial to Aam Admi is graudally decrease the percentage contribution as one moves upwards on the salary ladder or have graded interest rates.
Comment by Anshul — August 25, 2007 @ 8:36 pm