PF limits

Given that nearly 90 per cent of the Indian workforce has no access to post-retirement social security, any move to address this situation must be welcomed. In this context, the enhancement in the wage ceiling for employees to be compulsorily enrolled in the Employees Provident Fund Organisation (EPFO) from ₹6,500 to ₹15,000 per month with effect from September 1, should be viewed positively. This move is expected to expand the EPFO’s coverage by a significant 30 per cent, providing retirement benefits to lakhs of additional workers employed in sectors such as building and construction, mining, hospitals, hotels and retail trade. The existing wage ceiling of ₹6,500 (up to which every employer must make compulsory contributions to PF) was set way back in 2001 and inflation warrants a revision.

However, it is hard to ignore that the Centre is casting the financial burden of this enhanced social security cover mainly on the private sector. The effect of this move is to peg up every beneficiary employee’s monthly pay by 12 per cent (the extent of employer’s contribution to PF). This sudden and steep hike in statutory obligations requires private firms to find significant additional resources to fund the additional contributions from next month. While large, listed companies may not find this much of a hardship (many already make voluntary contributions above the ceiling), micro, small and medium enterprises (MSMEs) will be faced with a challenge. A rough estimate is that that average MSME wage bills may spike by 2 to 3 per cent, eating into profit margins; certainly an unkindly cut in the middle of a downturn. If firms decide to adopt shortcuts such as pruning perquisites and skipping customary increments to deal with this spike, it will end up hurting the very employees it is intended to benefit. A phased increase in the wage ceiling may have helped improve the EPFO coverage without dealing a blow to these private firms.

Apart from this, the Centre should take note of the fact that merely stepping up the statutory contributions to the EPF will not automatically take care of the retirement security of the organised workforce. The EPFO too must be more accountable for the returns that it generates from its behemoth (already over ₹6 lakh crore) corpus. For one, the fund’s investment strategies need urgent review. Extremely passive management, with the bulk of money parked in government and public sector bonds, has prevented the fund from delivering an inflation-beating return in three of the last four years. Then, the fund’s high administrative costs, its method of selecting its fund managers and its decision to change them every three years, all contribute to sub-optimal returns. Now that private sector employers have been forced to do their bit for social security, it is time that the EPFO too was rid of these inefficiencies and forced to pull its weight.

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