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July 2006 - December 2006 IndexWhy
jeopardise retirement income ? Should pension funds be allowed to invest on the stock markets? From where has this question sprung? Is it from the point of view of improving the benefit package for contributors to the pension fund? Pathetically, no. This issue has been flagged off from a narrow perspective—that the existing social security pension systems are no longer sustainable by reason of the ageing population, which could prove to be an unbearable burden on governments. More importantly, this issue is not simply about an investment option; it is inextricably linked to an individual retirement account concept and privatisation of pension, otherwise called pension reforms. The debate on pension reform began with the 1994 World Bank report ‘Averting the old age crisis: Policies to protect the old and promote growth’. The report made a case for a mandatory, privately-managed and defined contribution pension system. The World Bank report’s approach to old-age protection is a three-tiered system consisting of a publicly managed, defined benefit scheme as the first tier; a privately-managed, defined contribution savings scheme as the second tier; and a voluntary savings scheme as the third tier. There was divergence of views on these prescriptions of the World Bank. Roger Beattie of the International Labour Office (ILO) and Warren R McGillivray of the International Social Security Association (ISSA) disputed these findings and called the proposed system a “risky strategy”. They maintained that the strategy outlined in the report involving the replacement of social insurance by (privately managed) mandatory savings schemes would involve an unacceptably high degree of risk for workers and pensioners and make old-age protection more costly. They also said that the transition would impose a heavy burden on the current generation of workers. What is envisaged now is a scheme of things where employees’ contributions are pooled in individual retirement accounts and handed over to pension fund managers who would then offer a few variants of investment options, of which stock markets are a necessary component. The main issue is the uncertainty surrounding what the employees can get from individual accounts. They will not have a guaranteed benefit, like under the public pension scheme. It would depend on how well their investments have performed or, more precisely, how well they perform at the point when the individual retires. Columnists, who extol the virtues of the stock markets generating phenomenal returns are only spreading absurd myths. They do not realise that the stock markets can witness a boom as well as a crash. Crashes have been witnessed and scams have surfaced several times during these ‘golden years of reforms’. A privately managed, defined contribution pension system, it has been argued, will promote competition, give workers a free choice when investing their funds, provide higher rates of return, entail lower administrative costs, involve less cost to the government, insulate them from political influence and promote greater transparency. Hector Inductivo of the International Social Security Association in his paper ‘Privately managed old-age pension schemes: Theory and reality’ has called the bluff of everyone making these tall claims with insightful research and analysis of the Chilean model. He cautions: “It is, therefore, important for governments to know the real implications and complications of the private pension system before adopting it as an alternative to their own existing schemes, lest they jump from the frying pan into the fire.” Be it in the US or Chile, private pension systems have been accompanied by a state guaranteed minimum pension. In India, the move is to make this the sole pension option. It is worth reminding those who advocate stock market investment of pension contributions that in the US, it is only under 401(k), the voluntary additional pension scheme, that such an investment option is permissible and not under 301(k), the mandatory pension scheme. The principal objective of a pension is to provide adequate retirement income and any ‘reform’ that jeopardises this cannot merit consideration. —The writer is secretary, Centre of Indian Trade Unions |
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