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print versionPUCL Bulletin, April 2013
by Piyush Pant
It seems that Manmohan Singh government refuses to see the writing on the wall or is it that it has deliberately blindfolded itself to avoid seeing the reality. Or can we say that it has conveniently assigned for itself the role of the agent of Multinational corporates bent upon marauding the Indian economy. Otherwise why the Indian government should keep opening mercilessly the door of Indian economy for the foreign capital when the role of unbridled capital in devastating the US and European economy has amply been proved. In order to wriggle itself out from the mounting criticism of policy paralysis and to prove that it has not lost the track of economic reforms, the Manmohan Singh government has now set itself upon the road to further economic reforms knowing it well that these reforms are not the panacea for the falling economic growth and the mounting fiscal deficit. It is well known that these types of reforms played havoc with the economies of Latin American and later East Asian countries. It is to be mentioned that many Latin American countries imitated the Chile and reformed their pension systems in 1990s, turning them into a fully or partially funded system of mandatory individual accounts. But the privatization of pension has not lived up to the promises of its proponents and supporters. It was supposed to improve the coverage and benefits to the workers and the generation of savings was supposed to stimulate the market. But it failed on both the counts. Even the World Bank, once the ideological and financial supporter of countries willing to follow the privatization path in 1990s, revised its position, indicating the outward signs of the unsuccessful choice.
Instead of handing over the pension and savings of the workers to the vagaries of the financial market, the Manmohan Singh government should pay heed to the fact that in the new social and economic scenario, countries that had made reforms are now working on "reforming the reforms". Chile itself, which is often quoted as the ideal case of pension reforms by the proponents, has recently created a basic pension for low- income earning over 65 citizens who couldn’t retire in the private system. This failure was due to insufficient accumulated funds or simply because individuals could never contribute as many had to survive on low incomes in the informal economy. Similarly in Argentina, President Chrstina Kirchner has announced the government’s intention of nationalizing nearly 30 billion USD of private pension funds to protect retirees from falling stocks and bonds as a result of the current international financial crisis. In fact the experience of Latin American countries has been that basing itself on the ’advantages’ of private investment over a state-run system, the new social security system has been a complete failure. Says international organisation Social Watch-"Far from guaranteeing workers a dignified pension, privatization has established a system in which the saver has less control over his or her destiny. The new prevailing reality has failed to achieve the reform’s objectives of greater coverage, more transparency and the promised increase in retirement income."
Take the case of Bolivia. A report published by Social Watch says- In Bolivia pension system reform was presented as a social necessity, an argument that was supported by the clearly dysfunctional state of the existing pension system in force for several decades - but was in fact designed as a potential source of profit for private investment. According to one of the main promoters of the reform (Peña Rueda, 1996), the replacement of the ’pay as you go’ (PAYG) social security system was justified by data suggesting its virtually bankrupt state as:
â— The proportion of active workers to pensioners was three to one, which is insufficient to financially support the system and much less than what is considered to be the ideal proportion (ten to one).
â— The coverage of the system was very limited with only 314,437 regular contributors in an economically active population of 2.6 million.
â— The system was discriminatory in its lack of coverage for the substantial number of non- salaried workers.
â— The system was vulnerable to inflation and employment fluctuations and mobility.
Hence a new system was implemented that would allow the state to reduce, and ultimately eliminate its financial burden from the old bankrupt system and would provide adequate benefits to guarantee the population a dignified retirement from active working life. The intention was for this new system to have the following characteristics: a broadened reach including segments of the population not previously covered, in particular non- salaried workers; capacity for self- financing; investment management transparency; potential for strengthening the stock market; capacity for continuity in times of economic crisis; capacity to create mechanisms for maintaining the value of pensions; capacity to increase the incomes of Bolivians over the age of retirement.
More than five years after the implementation of pension system reforms, it was found that a comparison of both social security systems’ coverage, taking into account their relative size as a proportion of the economically active population, reveals that the situation has not changed significantly since the reform. According to the National Employment Survey, in 1996 the economically active population figures were higher than in the 2001 Census and the projection for 2002.Even worse, if we take the data used by government officials in charge of implementing the reform (an economically active population of 2.6 million in1996), the previous system would have a much greater coverage than the current one, with the number of contributing workers amounting to 12% of the active population. To the discomfort of the reform’s designers and implementers, disaggregated data on the number of affiliates per type of worker also fail to indicate any clear superiority of the new system in extending coverage to non- salaried or independent worker categories. According to Pension Fund Association (PFA) information, by June 2003 the number of independent workers affiliated to the pension funds was only 4.3% of the total number of affiliates.
This is to be remembered that the promoters of social security reform in Bolivia had made promise of dignified pensions that would improve on the social results of the previous PAYG system. This became the main justification put forward by reformers. However, an evaluation of results indicates a worse situation and reinforces the hypothesis that the true objectives of the reform bore little relation to the endeavour to create better living conditions for the working population. In the first place, transforming the system has not generated a significant increase in the number of beneficiaries, so it cannot be said that it has contributed to a reduction in the widespread phenomenon of large social groups being excluded from social security benefits. Secondly, the promise of increased incomes has met with similar disappointment. The new scheme was designed in such a way that access to a pension is linked to a substantially longer working life and in addition it does not guarantee access to a dignified pension for all workers. There is a special category provision in the Law of Pensions called ’minimum retirement’ that is applicable to a worker who has not paid enough contributions to finance a pension equivalent to at least 70% of the minimum national salary but who has reached 65 years of age. He or she will receive a pension or annual income equivalent to this percentage "until the accumulated funds are exhausted," irrespective of whether or not this pension covers all the remaining years of life after retirement. In short, there will be workers who only have access to a very small pension - the current minimum salary is no more than USD 58 a month - for a time that will not necessarily coincide with their remaining life span.
Thus the Bolivian example makes it clear that the two systems are guided by different perspectives: while the previous PAYG (Pay as you go) system regarded the provision of security to workers after their active working life as an inescapable obligation of the state, the new system abandons this state responsibility, delegating the provision of security for the economically inactive population to the ’efficient’ workings of the market.
Now the question is-Why Indian government is so desperate to hand over the pension sector to the private players? It should be remembered that when Pranab Mukherjee as Finance Minister had paid a visit to Washington, he had assured the American secretary for treasury that the Indian government would hurry up reforms like privatisation of pension, banking industry and more FDI in insurance sector. However, the oft-repeated and familiar government plea is that the national exchequer no longer has funds to serve the bourgeoning sector. Moreover, banking on the Old Age Social and Income Security (OASIS) report of 2000 the government says that the ranks of the elderly in India are growing at a higher rate (3.8 per cent per annum) than overall population (1.8 per cent). By 2030 the number of people over age 60 is expected to soar from the current 80 million to nearly 200 million. This will sharply increase the number of people per family depending on the working member for sustenance. The current pension system in no way provides for this shift. But the real objective is to privatise the sector. Through the Pension Fund Regulatory and Development Authority (PFRDA) Bill, the capitalists want to use the big pool of savings of the Indian working class, which has so far been under State control. It is said that the Bill is aimed at expanding the coverage of pension funds and converting them into source of finance for monopolist capitalist ventures. The Bill wants to provide cheap source of finance for the capitalist class, at the cost of guaranteed income to the workers once they are retired and old. It is being said in praise of the new pension scheme that it is meant to include crores of people who presently are not covered by any pension schemes. But the real intention is to make the capitalist employers free of their obligation to contribute to the retirement fund of those they employ. It is set to apply for both regular as well as contractual employees. It means that under this scheme, whatever the pensioner will get in the future will come out from his own contribution alone. There will be no contribution from any other source, not even by the central or state government. Thus the new scheme has all the potential to be doomed from the very start as the workers will prefer to keep their savings in long- term fixed deposits, or gold or in any other form they choose than joining a scheme fully financed by them and which puts their savings at the disposal of speculative world of stock markets.
Anti-employee tenor of the Pension Bill becomes clearer if we look at the provisions of the proposed Act. The important features of the Bill are-
1. Pension will be based on the amount of contributions made by the worker during his working life and the value of contribution at the time of retirement, which would be subject to fluctuations in the stock market. In other words, the value of workers’ savings would not be protected and there will be no pre-defined amount or ratio of salary that is guaranteed on retirement.
2. The government will give up its role of protecting the value of workers’ savings; it will instead hand over charge to various institutions of finance capital, both state owned and private, Indian and foreign.
3. A part of workers’ contributions will be invested in the stock market, and each contributing member will be given a choice about the composition in which his or her savings will be allocated, between government debt, shares of private companies and other financial instruments.
Thus a subscriber to the new pension scheme is said to be exposed to the following risks after retirement-
1. As per the scheme, a subscriber is to make the choice of investment portfolio. As bureaucrats are mostly uninformed in finance and investment related matters, one might end up in making wrong choices, which would eventually rob her or him of the old age pension.
2. If there is a major market shock, he/she may end with no ability to purchase an annuity and the entire money contributed by her or him may be lost.
3. Since annuity cannot be cost indexed, its real worth may fall, depending upon the inflationary pressures in the economy.
4. A subscriber is to perforce contribute towards the charges of investment managers, whose priority often is as to how much profit they could make through investment of the astronomical corpus of pension fund in the volatile share market.
Thus these provisions amply make it clear that on the pretext of increasing the reach of pension to all the working people, the Government is trying to convert the right of workers to pension into a scheme of robbing the workers for the benefit of the capitalists. It is not that this Right of the workers is self- assumed. It has been recognised by the Supreme Court as well in its various judgements. In one of the judgments, the Supreme Court said that "pension was not a bounty payable on the sweet-will and pleasure of the government and ... pension is a valuable right vesting in a government servant." Even the Fourth Pay Commission Report categorically declares "pension is not by way of charity or an ex-gratia payment, or purely social welfare measure, but may fairly be said to be in the nature of a ’right’ which is enforceable by law." In one of the judgments, the Supreme Court said that "pension was not a bounty payable on the sweet-will and pleasure of the government and ... pension is a valuable right vesting in a government servant."
Piyush Pant is senior journalist. Presently, he is Editor, Lok Samvad
