Friday, December 09, 2005

Oh woe, EPFO

The EPF "rate setting" is a perennial source of conflict and an expenditure of effort in public policy. In today's newspapers, there are atleast four edits on the subject (!): TOI, IE, BS and ET's exuberantly titled Disband the EPFO. And, Ila Patnaik has an excellent, fully reasoned piece titled Subsidy on icecream, anyone?. I agree with everything said in these five pieces :-)

The clarity on EPFO in public discussions - as seen in these five pieces in the newspapers on one day - has come a huge distance. It was not so long ago, in 1995, that the `Employee Pension Scheme' (EPS) was introduced. At the time, nobody understood what a mess was being created. It was a certain unthinking acceptance of the notion that `pensions are important', and a lack of knowledge amongst local economists (such as myself) about how the field works. Robert Palacios of the World Bank says that in 1995, he was quite clear that EPS had a funding gap on day 1, but I guess at the time, it was hard for people like him and Estelle James to communicate this to the people involved in the decision.

(Though, before we get too optimistic about `clarity on EPFO in public discussions', we have to be mindful about the worldview of the hapless lefties).

As with all deep-crises in Indian public policy, the EPFO problem has two layers. The upper layer is the obvious malfunctioning of the organisation: unfunded liabilities, the quest for subsidies, bad administration, potential for fraud, potential for dipping into unclaimed balances, etc. But when an agency malfunctions like this, there is always a deeper story about why the same kinds of employees of government, who are able to produce decent results in some agencies, are producing bad results in this agency. This goes back to the deeper question of legal foundations, governance, mandate, and accountability of EPFO. Solving the EPFO problem is not about minor surgery such as raising the contribution rate of EPS (even though that will help). It is about deeper institutional changes.

Gautam Bhardwaj's team at IIEF has built a great website on this subject including an encyclopaedia on Indian pension reform. My article for the inaugural India-and-China conference of the Lee Kuan Yew School of Public Policy (LKYSPP) at the National University of Singapore is now on my website. It is titled A sustainable and scalable approach to Indian pension reform. It summarises some of the facts and arguments about EPFO, and the rationale of the New Pension System.

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