PF Contribution Rates and Universal Social Security

Introduction

The Employees’ Provident Fund Organization is one of the world’s largest social security providers which covers approximately 10,24,188 establishments with 1,934 lakh members as of the financial year 2016-17. It administers three major schemes, namely: – 

• Employees’ Provident Funds Scheme
• Employees’ Pension Scheme
• Employees’ Deposit-Linked Insurance Scheme

Prior to the onset of COVID-19, PF contribution rates were fixed at 12% for both employers and employees. This figure excludes administrative charges that are borne solely by the employer. According to the EPFO Annual Report of 2016-17, the total amount of contribution received from the unexempted sector under the provident fund scheme stood at 81,289 crores.

The vast majority of corpus under the administration of the EPFO is invested in government securities and debt instruments. Short-term debt instruments, exchange traded funds (ETFs) and asset backed investments form a smaller portion of the investments made by the EPFO due to their risk ratings. This ensures that the fund generates enough revenue to continue catering to its members as well as providing benefits to the elderly who have ceased to be engaged in gainful employment. The trustees of the EPF engage portfolio managers as well as actuaries to determine the degree of risk to be undertaken vis-à-vis the amount of income to be generated from investment activities.

The Parliamentary Standing Committee on Labour has repeatedly stressed on the need for universal social security in India, with steps towards the same being taken ostensibly in the Code on Social Security, 2019. However, there is no clarity on the goals as well as the manner in which the same is to be achieved. This article examines plausible goals that a Universal Social Security scheme in India might seek to achieve as well as the manner in which the same can be done. It also analyses the role of the EPFO especially with regards to its PF contribution rates as well as its threshold for application in light of the unique characteristics of the Indian labour market.

How a Staggered Schedule of PF Contribution Rates Can Harness the Scheme’s Potential

Currently, the Employee Provident Fund’s coverage extends to only the formalized sector which accounts for about 10-15% of the Indian labour market. With over 90% of the entire workforce being informal and 85% of the non-agricultural workforce being informal India has immense economic potential. However, with a vast majority of the workforce outside the scope of social insurance, force majeure events are just one of the many threats that can cripple the middle and low-income earning groups. A recent example of the same is the migrant worker crisis and the widespread job-loss triggered by the COVID-19 lockdowns across the country. Several employees relied on their provident fund savings to cope with the financial ramifications of the virus.

From the above, two things are clear. First is the utility of having employees save regularly and the second being the need for broader coverage. The need for universal social security has already been affirmed by the Government. Thus, the question arises as to the role the EPF plays in the same and whether it can operate as the flagship scheme under the proposed universal social security scheme. The author of this article believes that the latter is true, provided that the scheme of EPF is restructured to incorporate a larger portion of our labour market. This will not only aid in the formalization process but will also help in ensuring the realization of universal social security.

To achieve the above-mentioned goal of universal social security, certain changes need to be brought about in the scheme of the same in the country. Chapter-VIII of the Code on Social Security, for example, relates to the creation, administration, and implementation of social security schemes for platform, gig, and unorganized workers, respectively. Such schemes would need to be brought under the umbrella of the EPFO with lowered rates of contribution for such classes of workers to ensure two things: –

• That payment of PF contribution does not disproportionately burden these workers by taking a large portion of their salary
• Parallel creation of agencies is avoided and that their PF contributions supplement the corpus of the EPFO leading to its overall increase

Similar steps can be taken with respect to social security schemes for building and other construction workers as well as other special categories of workers. It is important to note that universalization does not mean that these workers lose benefits that are specific to their nature of employment. Rather, it means that they are all part of the same social security scheme and are contributing to the corpus of a single fund. Their special needs can still be addressed as the fund’s corpus would be substantially larger.

The above steps address two significant challenges simultaneously, those being formalization of the workforce as well as the provision of social security. The former is essential because it directly affects efforts to implement a universal social security scheme and thus incentivizing the participation of new entrants is essential. This can be done by giving greater flexibility to contributors in terms of the quantum of contribution. For this PF contribution rates have to be proportionate to the nature of employment as well as to the stage of life a contributing member is in. For example, new entrants from the informal as well as a formal sector should be asked to contribute at lower rates.

This ensures participation as well as longevity of membership and thus helps resolve the two problems mentioned earlier. Any staggered scheme of PF contributions would have to comprise of lower rates for minimum wage, daily wage, and low-wage earners as they cannot part with large portions of their income. High rates of PF contributions act as disincentives for individuals who belong to such classes of the workforce.

Social Protection Floors: A Tangible Goal

I.L.O. Recommendation No. 202 explains social protection floors as being nationally defined sets of basic social security guarantees that provide access to essential healthcare and to basic income security for all those in need over their life cycle. They are different from social security nets as the latter aim to provide the poor and vulnerable with targeted support in the form of non-contributory transfers. Whereas social protection floors are publicly funded through contributions of the working populace.

Social protection floors give priority to the marginalized groups in nations such as children, the elderly, informal workers, disenfranchised groups etc. They are linked to human rights standards and the same can be seen as the goals that social protection floors seek to achieve. A national scheme of social protection floors linked to a universal social security program spearheaded by the EPF scheme would be the most feasible of catering to India’s vast population.

Do you think universal social security is feasible in India? Can a staggered scheme of PF contributions coupled with social protection floors provide for universal social security in India?

Leave your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney. Simpliance makes no representations or warranties in relation to the information on this article.