Contributory provident fund for civil servants

by Dhiman Chowdhury | Published: 00:05, Jun 17,2017 | Updated: 23:35, Jun 16,2017

 
 

THE pension of civil servants in most of the South Asian countries, not to speak of the OECD countries, is contributory. It is contributed by the government and employees. The contribution of employees accounts for 3 per cent of the monthly salaries in Thailand, 4.75 per cent in Indonesia which has recently been increased to 8 per cent, and 5 per cent in Vietnam. Nepal charges national insurance tax at 1 per cent on the first NPR 2,50,000 of personal income of all employees in the formal sector for universal social security benefits for widows and marginalised citizens.
The pension of civil servants in most of the OECD countries was state-funded up to the early 20th century. Pension reforms undertaken in these countries have taken many forms: increasing the retirement age, increasing contributions, reductions in generous benefits, and promotion of private pensions.
Generous pension for civil servants: Although the government spends 0.5 of the gross domestic product on public pension compared with 7.8 per cent in the OECD and more than 1 per cent in other South Asian countries, its pension is still generous, considering the replacement rate such as retirement benefits as a percentage of work time earnings, which is 67 per cent in the United Kingdom, 68 per cent in India and 60 per cent in Bangladesh and Pakistan.
Importantly, replacement rates in the private sector in the United Kingdom, the United States and Germany are 38 per cent, 45 per cent and 35 per cent respectively whereas only Bangladesh in South Asia does not have a provident fund in the private sector except in some large urban business organisations.
The lowest social protection for ordinary people but generous pension for the elite: Our social protection expenditure is the lowest in South Asia. It is 1.4 per cent of the gross domestic product compared with 1.7 per cent in India, and more than 3 per cent in Thailand, Vietnam and Sri Lanka. Our access to drinking water is 87 per cent, which is the lowest in South Asia and to sanitation is 61 per cent only higher than India. Other social protection services such as police service, roads, per capita health expenditure are all at the lowest level compared with those in other countries. Our road distance is only 215km per 1 million of people compared with 5,433km per 1 million of people in Sri Lanka, 4,209km in India, 2,609km in Thailand, 2,169km in Vietnam, 2,111km in the Philippines, 1,925km in Indonesia, 1,318km in Pakistan and 640km in Nepal.
National state pension for formal sector premature when social protection so low: All advanced democracies, OECD countries and even many South Asian countries have basic state pension mainly for the formal sector funded by government tax revenue and employee-contributed national insurance tax. I believe this government-subsidised pension (other than pension for the marginalised) is premature in Bangladesh. Workers in the informal sector here account for 75 to 80 per cent of the total labour force. Although this is also the case in other South Asian countries, their social protection services are significantly higher than ours and social protection plays a great role in institutionalising their informal sector. Their roads and communications, law and order, basic health, water and sanitation have given them much mobility from the informal to the formal sector. In such low level of social protection and public provisions, governments should be providing them on a priority basis. Otherwise, government-subsidised basic state pension will only be received by the 20 per cent of the labour force in the formal sector.
State pension for the unorganised sector: There can be a state pension for the unorganised sector workers such as marginal farmers, street vendors, day labourers, rickshaw-pullers and house helps on a voluntary basis where both workers and the government will contribute. India has introduced such a pension scheme in 2015 where the government contributes 50 per cent of the subscriber’s contribution or Rs 1,000 a year whichever is lower. Each subscriber is given a permanent retirement account number which can be used from any location. The individual will receive a fixed pension from Rs 1,000 to Rs 5,000 a year depending on his contribution. China also has such a plan for rural workers who contribute RMB 100 to RMB 500 and the government contributes RMB 30 every year.
Government regulation for mandatory contributory provident fund in private sector premature: All the South Asian governments except Bangladesh’s have regulation for compulsory contributory provident fund in the private sector. Employers’ contribution is 7.07 per cent of employees’ salaries in the Philippines, 3.7 per cent in Indonesia, 3 per cent in Thailand, 6 per cent in Pakistan (in establishments with 10 or more employees), 10 per cent in Nepal, and 12 per in India (in establishments with 20 or more employees earning Rs 15,000 a month).
Employees also pay the same or lesser amount and the total money is invested in various government and private investments managed and governed by a trustee board dominated by government employees. We have our Provident Fund Act 1925, which is particularly meant for the public sector and it requires all public sector employees only (not the government) to save 10 per cent of their basic salary. This act, however, made employer- and employee-contributed provident fund voluntary in the private sector, but compulsory in only tea plantation and newspaper industries where employers and employees will contribute 7 to 8 per cent of basic salaries (Section 265 and 268).
Compliance is rare in Bangladesh. Participation rates are very low even in all these countries compared with OECD countries. Only 10 to 27 per cent of the labour force participates in these countries compared to 40 per cent in the OECD countries. Importantly, this participation rate is positively and significantly related to social protection and public provisions. For example, in South Asia, Thailand, Sri Lanka and the Philippines have relatively higher social protection and higher participation rates of 27 per cent, 23 per cent and 15 per cent respectively compared with Indonesia, India and Pakistan with lower social protection and lower participation rates of 12 per cent, 10 per cent and 8 per cent respectively. There is widespread non-compliance in India where a large number of employees are being hired on a contract basis, and in many cases contract employees are not being provided with provident fund.
Restrictive labour laws have evidences of hurting the employment around the world, particularly where unemployment is a serious problem. Although national unemployment rate is shown 5 per cent, which is at par with other South Asian countries, the nature of jobs (odd jobs) is not considered. Fifteen to 20 per cent of our labour force is composed of rickshaw-pullers and street vendors. Another 20 per cent to 25 per cent informal sector workers such as day labourers, transport workers and even employees in small retail shops are very unsecure, vulnerable and dependent on whims of employers.
The picture of informal sector in other South Asian countries except in India and Pakistan is somewhat different. Roads and communications, security, law and order, free space per capita, and governance, and other social protection and public provisions are much better which have a role in organising the informal sector and giving humanity to it.

Dhiman Chowdhury is a professor of accounting in the University of Dhaka.

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