As India addresses the challenges of the twenty-first century and manages its rise globally, constructing and implementing a modern social security system represents among the major policy imperatives. A modern social security system can enable India to cushion the burden on workers in public and private organisations requiring restructuring; to increase the legitimacy of reforms required to sustain high inclusive growth; and to encourage individuals and firms to engage in entrepreneurship and make creative career choices. All three are essential for India to emerge as a resilient, knowledge-driven economy and society.
There are other reasons for urgency in undertaking social security reform.
While India is currently exhibiting a favourable demographic phase, with share of working age population in total population expected to increase from 56.2 percent in 2000 to 64.4 percent in 2025. India is projected to experience a sharp increase in its elderly population from 100 million in 2010 to 330 million in 2050. This increase is due to decline in fertility and increasing life expectancy. It is anticipated that by the year 2020 India would have achieved a replacement rate fertility level of 2.15. The average Indian woman has achieved longer life expectancy than her male counterpart, and this difference is expected to increase. The resulting feminisation of the elderly will need to be incorporated in social security policies.
The sheer number of elderly would pose formidable challenges in designing, administering, and sustaining social security schemes and programs. Even if India sustains high growth rates experienced in recent years, its per capita income by 2050 will still be relatively low. This implies that India must not only pursue policies which sustain high growth, but that distribution of income between the young and the old, and among the elderly will need to be given due weight. The social and political management of ageing will therefore acquire considerable significance.
So flexibility in meeting differing needs of the elderly, and reversibility to ensure that design or other errors in social security programmes are not too costly, acquire greater importance in the Indian context.
Fiscal consolidation and flexibility
India’s combined public sector deficit exceeds 10 percent of GDP, while total public debt, mostly internal rather than external, is around 85 percent of GDP. This is not sustainable from a macroeconomic perspective. Fiscal flexibility is relevant because if a very large proportion of the expenditure is spent on items such as wages, pensions, and other current expenditure, there will less flexibility in reallocating expenditure towards growth and social cohesion enhancing activities.
India’s current social security system is complex. It was largely developed before the pre-1991 reforms designed to integrate India with the world economy in a market-consistent manner, and shift the state-market balance in favour of the later. It is characterised by low coverage (at best, only about a quarter of the labour force is covered by at least one of the social security programmes) and inadequate replacement rates.
India’s health care system, an integral part of the social security system, is characterised by generally low accessibility and affordability, high share of out-of-pocket health expenditure, and inability of the public-sector health care organisations to provide effective competition to private-sector providers. The transition from communicable to lifestyle disease patterns and largely unregulated and uncoordinated introduction of new technologies in the health sector are increasing the complexity of constructing adequate and efficient health care systems in India.
Integrate social sector policies with other policies
There is a strong case for viewing social security systems as an integral part of the overall economic, social, human resource management in India. This will require a change in the mindset of provident and pension fund organisations and of labour and other ministries from short-term electoral advantage-driven welfare orientation towards greater professional-technocratic, service-provider orientation.
The need for effective management and application of the principles of pension economics and finance in social security policy-making and administration must receive much greater recognition than is the case currently. An unplanned increase in the longevity of members by one or two years, for example, could disproportionately affect the financial viability of the pension and health care schemes.
Take a systemic view
Different components of the social security system in India have evolved, over time, in isolation. As a result, there is limited coordination among different schemes, such as those for civil servants and private sector workers. For a systemic perspective, it is imperative that the Pension Fund Regulatory and Development Authority (PFRDA) Bill, which has been languishing for several years in Parliament, be passed expeditiously.
The ultimate contingent liability of nearly all social security schemes in India is on the state and, therefore, borne by taxpayers. This is illustrated by the recent press reports that Mahanagar Telephone Nigam Limited (MTNL), a public sector telecom firm, has requested the government to bear the pension costs of its employees. Many public sector financial institutions are also likely to be constrained in meeting the pension and health care promises made to their employees. Recent changes in accounting practices will require all companies to reflect their accrued pension and health care liabilities in their profit and loss accounts and balance sheets.
There is a strong case for a multi-tiered social security system under which an individual obtains retirement income not from just one scheme but from a variety of sources. This permits risk diversification for the individual and for society as a whole. A multi-tiered approach can help balance the retirement risks borne by individuals and by society, and develop a different mix of financing from taxes, contributions and other methods. Each scheme need no longer be devised to provide full retirement benefits.
In India, retirement income transfers, partly or fully financed from the budget, will be needed as one of the tiers. The extent to which this tier can be developed will depend on the fiscal capacity of the government and on the efficacy of government service delivery systems. The existing network of strong micro-finance institutions and community organisations can be utilised to reach relatively low-income and self-employed workers, particularly women, through micro-pension products.
There are two aspects of a systemic approach to social security arrangements in India that are worth considering. The first is the need for an overall National Social Security Council (NSSC) for strategic policy direction and coherence among different components of the social security system. The second is the need for a pension regulator to ensure that the provident and pension fund organisations undertake their core functions with the requisite professionalism, and that their governance structures meet international best practices. The composition of most of the provident and pension fund boards in India, in both the public and the private sectors, reflects insufficient expertise, autonomy, transparency and accountability in their operations. This needs to be urgently addressed by NSSC and the pension regulator.
There is also a need to begin graduate-level courses in social security policy and management. The role of the National Academy of Training and Research in Social Security (NATRSS) ought to be reconsidered. The tendency of almost exclusively relying on current and retired civil servants to be faculty members and resource persons at such institutions must be urgently reviewed.
India has an opportunity to develop the pension sector as a significant component of its overall financial sector, and secure opportunities to turn the expertise to its economic advantage through the export of pension-related services.
Complementary reforms in other areas
Effective social security reform requires complementary reforms in areas such as labour markets, fiscal policies, civil service, financial and capital markets, and family policies. Thus, to financially sustain the Old Age Pension Scheme jointly undertaken by the Union and the States; and Swavalamban scheme announced in the 2010 budget for those joining the National Pension Scheme, will require greater urgency in fiscal consolidation and in reforming service-delivery mechanisms.
A provident fund that invests nearly all of its assets in gilts (a specialised type of investment offered by the government which pays a fixed rate of interest and is considered low-risk) and does not take advantage of trading opportunities will forego opportunities to benefit its members by more professional portfolio management. This may lead to a reduction in national savings to the extent that such a practice weakens the government’s fiscal discipline due to the availability of cheap funds. The main purpose of mandatory saving—which is to intermediate these savings into productive investments that, in turn, can up the trend rate of economic growth—is defeated. Only when this is done can pensions be regarded as fully funded.
Reform the health sector
The fourth theme concerns the health sector. The key goals should be to accessibility, affordability, managing costs, and reforming public sector health institutions to enable them to provide effective competition to private and not-for-profit sectors. As with pensions, health insurance schemes need to be sustainable for a prolonged period, and exhibit tyranny of small numbers where by a seemingly minor change in parameters can significantly affect the financial viability of the scheme. The need for greater professionalism is designing health policies and managing health institutions is an imperative for India.
The fifth theme concerns the need for more empirical, evidence-based social security policies, particularly in pensions and health care, which require sophisticated price-discovery mechanisms. It calls for developing indigenous analytical capacities and professionals, building robust databases and establishing professional programmes relating to pensions, health policy and management, and actuarial sciences.
The citizen at the centre
Each of the above five themes is of relevance for constructing more robust, sustainable, professionally managed and regulated social security systems in India. It is often far easier, politically, to increase the demand for pension or health care services. But, if there is no commensurate increase in supply and in the fiscal, institutional, and organisational capacities, the outcomes will be limited. Careful planning and homework is required before introducing new social security schemes or reforming existing ones.
There is a case for revamping the recruitment policies and the organisational and governance structures of major provident and pension organisations in India, such as the Employees Provident Fund Organisation and the Employees State Insurance Scheme (which is responsible for the delivery of health care services). The practice of using the provident fund of government employees to finance current expenditure must stop. India must establish sinking funds to systematically meet the future health care and pension obligations of its public sector organisations.
India has a favourable demographic profile and the capabilities to harness this potential opportunity and make measurable progress towards its professed goal of constructing and implementing a modern social security system—one that is sustainable and covers most of the population. However, progress will not be easy. Sustained focus and efforts will be required. Moreover, pension economics literacy of the stakeholders, particularly of policy-makers and the managers and trustees of provident and pension fund organisations, will have to be substantially improved.
For substantive sustainable social security reform in India, a change in mindset from provider-producer interest dominance to consumer/citizen-centric procedures and attitudes is essential.
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