Universal Pension Scheme: Rushed or timely?
This ambitious plan raises questions about its viability and the strategies the government will employ to ensure its success. The Business Standard has spoken to experts to gain deeper insights into this matter
The government is poised to introduce the Universal Pension Scheme (UPS) on August 17, with the goal of creating a sustainable social security network for senior citizens in the private, informal, and expatriate sectors, as well as for those facing financial hardship. Under this scheme, participants are promised benefits that are 12 times the sum of their contributions over a span of 42 years.
This ambitious plan raises questions about its viability and the strategies the government will employ to ensure its success. The Business Standard has spoken to experts to gain deeper insights into this matter.
'A lot of homework is yet to be done'
Debapriya Bhattacharya
Distinguished Fellow, Centre for Policy Dialogue (CPD)
Keep updated, follow The Business Standard's Google news channel
The decision by the government to launch the universal pension scheme is a good one. This is a joint success of the government as well as civil society, as concerned analysts have been advocating for it. It is only befitting to have a Universal Pension Scheme (UPS) for citizens of a middle-income country.
However, the current announcement comes at a time when the government is approaching the national election. Thus, the government appears to be premature in launching this scheme, given that many fundamental provisions have not yet been sorted out, and the institutional coordination mechanism is not in place. It seems like a rushed decision within the government—more driven by the electoral agenda and less by the genuine financial needs of the citizens at this moment.
Even if it is launched today, it remains unclear how individuals will enroll in the scheme and how the coordination mechanism will function among the four or five involved institutions. The collection process and the location of the collected funds, along with the applicable interest rate, have not been clarified. Furthermore, it's uncertain if the rate of return from these funds will be sufficient to provide the promised benefits to the senior citizens.
Moreover, the coverage of the four specific groups mentioned is also a bit tricky due to the lack of clear definitions in this case.
To see real benefits coming out of this scheme, we will have to wait for a considerable amount of time. At this moment, the government is more focused on delivering political rhetoric in terms of delivering their electoral promises.
A lot of homework is yet to be done. The launch date has been pushed forward due to electoral compulsions. Even in the last budget, specific allocations for this purpose were not made. Consequently, there is currently no available funding for this scheme. For example, the organisation responsible for managing this activity has not been specified yet. The allocation of human resources for this scheme is pending, and their salaries are yet to be determined. Thus, it seems to be nothing more than a declaration.
'Should have taken three to five years to implement the scheme'
Ahsan H Mansur
Executive Director, Policy Research Institute of Bangladesh
There is no doubt about the importance of the Universal Pension Scheme. But to announce it all of a sudden is a hasty decision. A long-term plan of at least three to five years should have been taken before its implementation.
The government may have decided to roll it out right now keeping the upcoming general elections in mind. But they have to realise that it's not just another election issue, it's an issue for 100 years.
So, they should have implemented it only after putting proper laws and systematic investment safeguards in place. But that's not the case here. We don't know where the money would be invested, or if the benefit would be fixed, or adjusted periodically based on the return. There is nothing called the "fixed benefit" in any place in the world.
Also, 60 years is being considered as the retirement age. But nowhere in the world is 60 years the age for retirement anymore. People retire at the age of 65 or 67. Average life expectancy is on the rise, and so should be the retirement age.
Take France for example. Only this year there was a protest after the reformation of the pension law to increase the retirement age from 62 to 64.
The inflation rate should be taken into consideration as well. Now they are talking about giving an interest rate of 8%, but what if the inflation rate rises to 20% after a few years? Then the real return rate wouldn't even be 2%. So, there should be the spaces for such adjustments.
And to be frank, we are not yet ready for such a big step. We don't have the capacity or resources to make it happen. For implementing a scheme like this, there should be a separate institution; maybe a Social Security Department or something like that.
Institutional structure must be built first and foremost, with proper planning and by setting up operational and advisory boards.
And the liability should fall on the beneficiaries. The pension for the ultra poor should come straight from the national budget. But other than that, the scheme should be entirely self-funded. The government shouldn't spend even a single cent from its own fund.
'A pilot project would have helped'
Dr Fahmida Khatun
Executive Director, Centre for Policy Dialogue (CPD)
As I have said earlier, in the face of increased government expenditure and a very limited fiscal space due to extremely low revenue collection effort, implementing the UPS will be a challenging task. Since nothing has changed much since then, it still remains a challenge.
And the government having to pay up after a while is not the only concern here. Studies and reports reveal that collecting pensions is not a very simple process. People who are part of existing pension schemes frequently complain of harassment. So, the payment process needs to be smooth and hassle-free.
As far as I am aware, no pilot project has been conducted to test the feasibility of this scheme. A pilot project would have helped us understand the inner workings of the project better.
Another issue is the Somota scheme for the very poor. In this scheme, with a subscription rate of Tk1,000 per month, the contributor pays Tk500, while the government covers the remaining Tk500. For the ultra-poor, even Tk500 might be hard to procure. This might prove to be a problem.
At the moment, the low fixed income group, as well as the poor and the ultra-poor, are feeling the inflationary pressure, so they will struggle with this subscription rate.
One question that has not been answered is, what will happen if someone misses a monthly payment? Will they have to pay a fine next month? What will happen if someone wants to pull out also remains unclear.
The fact that people will have to go to the bank to make their monthly contribution can be an issue, especially for the unbanked. Also, the fact that people have to register through an app will be an issue for the elderly, especially the rural elderly.
Officials of the Ministry of Finance say that the implementation of the Universal Pension Scheme will create an opportunity to gradually reduce the number of beneficiaries of the existing social security programme, but social security programmes usually pay people allowances or school stipends. People who qualify for this will find it difficult to pay the minimum monthly premium, so I don't think the Universal Pension Scheme will significantly reduce the number of beneficiaries of the existing social security programme. In fact, we need to spend more on social safety nets.
'Not sure if it can be materialised without proper planning'
Shirin Sharmin
Assistant Professor, Presidency University
When it comes to a Universal Pension Scheme, we always expect a higher return. Even in the report published in The Business Standard on Thursday, it has been shown how much one can get in return against depositing a certain amount of money.
But as far as I understand, the government has never revealed where they would invest the money, and which tools and instruments they would use, to get this kind of high return. I mean, they are not clarifying whether they would save a deposit, invest in any capital market, or if they have any systematic plan.
If they just take the money from people without any proper planning, I don't think that would be a good idea, and in no way would they generate a good return. They have to make sure to maximise the investment.
Having said that, if planned properly, such a scheme could be a very lucrative option for the government as well. Because they are in a fund crisis right now. Here, they will be getting a huge amount of money from people, and for a long period of time, they will not have to return it. So, they could benefit from such funding, provided they have proper planning in place.
Also, if planned accordingly, introducing the Universal Pension Scheme is a laudable move, because it will establish a sustainable social security system in a country where over 85% of the workforce are employed in the informal sector that does not provide any type of social security framework.
If it can be materialised, a large number of citizens from both the formal and informal sectors will come under the institutional social safety net.
However, another big concern here is, before making any investment, we generally ponder over whether there is any dedicated management.
Right now, the audit department has experience of handling something like this. It is responsible for supervising the pension for government employees. But here it looks like the Ministry of Finance will look after things. But the finance department deals with something different. They are not concerned with this type of activity. So I am not sure how the scheme will be carried out.
The government should have explained these things beforehand. Besides, while implementing this scheme, they will have to face some key challenges as well.
Firstly, It will be a gigantic task for the government to provide the seed fund to start the pension scheme. The government must ensure that contributing to pensions will not deter the current growth trajectory of the economy.
Also, good governance and accountability in every step of the project needs to be ensured for successfully running the project
