Jobs vs pensions

Designing a social security system is too important and inter-disciplinary to be left to the Ministry of Labour & Employment

The draft labour code on social security published on the Ministry of Labour & Employment website is an ambitious but incomplete document. What should have been a simple exercise in consolidating 15 labour laws is dangerous for three reasons; a) it does not recognise that social security systems for old age are structurally different from those designed for poverty, b) it tries to combine elements of Universal Basic Income, Direct Benefits Transfer, Provident Fund, Health Insurance, Maternity Benefit, etc. without thinking about financing (payroll confiscation versus individual savings versus government spending), and c) it fails to learn lessons from the problems of rich country social security systems like fiscal sustainability, administrative costs, political design abuse, and much else. We would like to make the case that this labour code draft should revert to its original mandate of consolidating existing laws and a separate multi-ministry, multi-stakeholder commission should examine the desirability and feasibility of migrating our 50 million formal employment benefit system into a universal social security system for 1.25 billion citizens.

The human race hit peak child last month; for the first time in human history the number of people less than five years old is less than the number of people more than 65 years old. This ageing is pervasive — a Korean woman can expect to live till 90, a single pension fund for California school teachers has 300 members more than 100 years old, and sales of adult diapers in Japan have crossed that of baby diapers. Rich country social security promises will be broken because they were not designed to handle ageing or secular economic stagnation. Angela Merkel recently warned that 7 per cent of the world’s population living in Europe and generating 25 per cent of the world’s GDP cannot continue receiving 50 per cent of the world’s social spending. In England the average pensioner household enjoys more disposable income than an average working household. The unallocated part of the US federal budget has come down from 66 per cent in 1960 to 20 per cent today. But the young don’t vote and senior citizens are organised, activist and loud. Ageing societies are finding it politically hard to heal themselves — a potential President Emmanuel Macron’s election manifesto in economically stagnant France includes 100 per cent reimbursement from the government for dentures, glasses, and hearing aids — even though few disagree that the current generation in rich countries is legally stealing from its grandchildren by leaving behind huge unfunded and unsustainable social security liabilities.

The new draft labour code says its purpose is “an attempt to simplify, rationalise and consolidate the hitherto fragmented laws to make them less complex for easier comprehension implementation and enforcement” but it quickly wades into complicated and contradictory themes like universalisation (of citizen, poor or workers), ease-of-doing business (hardly accomplished by moving from defined contribution to defined benefit), cross-subsidisation (how can individual savings, payroll deductions and fiscal top-up be co-mingled into one account), mandatory rights approach (why exempt 50 per cent of labour force which is self-employed), a single account for voluntary contribution, mandatory contributions, mandatory subsidised scheme, and social assistance programme for poor (this is an accounting and actuarial impossibility), affordability (if somebody is capable of making mandatory employer based contributions in the second employer layer why force them to join the third layer employer subsidised scheme and if the third layer requires subsidy how it is different from the fourth fully subsidised layer), registration of workers (could somebody introduce them to Aadhaar), complexity (it anticipates contribution flexibility based on seasonality), and much else. The document’s philosophy seems overly influenced by the ILO; an organisation that has seemed past its expiry date for the past decade because it is out of touch with entrepreneurship, fiscal discipline and the new world of work. The Ministry of Labour & Employment’s track record with actuarial math is also dodgy — their 1995 replacing of part of the well-designed Provident Fund Scheme with the Employee Pension Scheme has created a ~50,000 crore unfunded liability. Our guesstimate suggests the proposed labour code could wipe out tax receipts. If the Ministry of Labour & Employment wanted to demonstrate ambition it should have reduced mandatory payroll confiscation of 45 per cent (PF, ESI, EDLI, EPS, LWF, etc.) that currently drives an unaffordable wedge between chitthi waali salary and haath waali salary and murders low wage formal employment. Or it should have challenged uncompetitive monopolies (EPFO and ESI are the world’s most expensive government securities mutual fund and health insurance scheme). The only social security India can afford is higher wages. And higher wages don’t come from regulatory fatwas but urbanisation, formalisation, industrialisation and human capital.

Social security is probably the most complex, political and inter-disciplinary horizontal in a vertically organised government. No single ministry has the knowledge to author a solution. A great new book called The Knowledge Illusion: Why We Never Think Alone by Sloman and Fernback argues that knowledge is the product of cognitive division of labour yet “we imagine ourselves as rugged individualists, growing our intellectual food, and living in mental houses built with our own hands”. This is a dangerous policy error. People who think they know more than they do about something complex — like social security — are more likely to have to strong opinions about it because we fill the gaps in our knowledge with value commitments. For example — in the draft labour code — social security has become about our attitude to poverty and not costs, formal job creation, and sustainability. We must rethink this labour code draft because it does not balance the difficult trade-offs between rich and poor citizens, informal and formal enterprises, mandatory and voluntary participation, employer versus individual funding, and unsubsidised versus subsidised accounts. However admirable the ambition of morphing the mandate of fixing labour law plumbing into forging a universal social security system, this is too complex to be left to the Ministry of Labour & Employment.