Home ›› 06 Mar 2022 ›› Editorial
Pension is designed for aged people who can no longer support themselves and depend on near and dear ones for financial, physical, and moral support. The terms pension and peace of mind are thus closely related. Many developed countries of the world such as the United States of America, the United Kingdom, Nordic countries, etc. provide both in-kind and financial assistance for a modest living of the aged people. They do it through schemes like social security benefits in the US or pay-as-you-go [PAYG] type in other industrial countries. Funded schemes often supplement the comprehensive coverage. The PAYG is operated mainly through the private sector. Individual contribution through payroll taxes during the working life determines the monthly pension amount, and at the very initiation, the flow of income is sufficient to cover benefits of a relatively small number of beneficiaries.
However, when the scheme enters into the second-tier, the primary cohort is supported by the second tier; additional fiscal stress is inevitable on two counts. The proportion of the retired elderly rises side by side with an increase in life expectancy. There are examples of this financial stress even in the examples of schemes run by the Western world countries. There is an apprehension on the basis of the report published in 2020 by the board of trustees of the US Federal Old-Age and Survivors Insurance Trust Fund and Federal Disability that the Social Security Scheme may face uncertainty as the reserves will be fully depleted by 2035 and annual taxes are expected to cover only about three-quarters of the benefits each year after that. The ultimate problem in such a scheme is balancing the flow of receipts and the expenditure streams in an inter-temporal framework. It is also often difficult to ensure fairness to all the stakeholders through policy changes. One option to circumvent the fiscal stress is to increase the retirement age when the second-tier cohort needs to work for more years to pay for the elderly but considering the value of money in the next three decades when they would be eligible to get the pension; the endowment may be paltry vis a vis the Consumer Price Index.
Again life expectancy varies among different groups of people. Consider the situation of a quasi-inverted pyramid: how does a small cohort support a big cohort? This is an impending danger in any pension scheme!
Bangladesh, a country still with a demographic dividend, could see the benefits of growth due to the vast working-age population but indeed, would be burdened with a growing age population by 2050-60 side by side with an increase in the average life expectancy from the current 73 years to 80 years.
Aged people constituted about eight per cent of the total population in 2019. The proportion of older people is expected to become 21.9 per cent in 2050, with 36 million people aged over 60. This means that for every five Bangladeshis, one will be a senior citizen. So, the introduction of a universal pension scheme [UPS] on the basis of the election manifesto of 2008 of the Awami League government is heartening. The government deserves special thanks for this noble venture and a preliminary work plan for its implementation. This attempt is commendable since there are only a few areas in Bangladesh where pension facilities exist; the public sector with about two million employees and a few autonomous institutions where gratuities and contributory provident fund work as a substitute for pension.
Unfortunately, employees in many private organizations with a well-defined service structure are not entitled to such facilities even with job experience of more than two decades. Many issues surface in securing the accumulated funds for disbursements at the ends of an individual’s working life. It is also imperative in the stocktaking of current drives and initiatives that can supplement as an effective alternative to UPS. The coverage issue is structurally crucial as the government’s elasticity of financial leverage in many instances is constrained by factors beyond control such as a drastic revision of GDP - tax ratio or an increase of an adequate tax base. Moreover, the experience with social security in many developed countries tells of the perils of such a wholesale approach. Many issues require careful scrutiny before initiating such a project of the inter-generational gap: who pays for who?
The stocktaking of current programmes that provide cash support to different sections of poor and old people and a comprehensive study on the effectiveness of such a drive is crucial for consolidation. There should be clear guidelines on the inclusiveness issue, the mode of payment, the number of years of active working experience, the modalities during the transition period of an employee from one unit to another unit and on the question of abrupt termination of an individual from the scheme or death of an individual. An alternative to UPS could be a well-developed social safety net programme constituting both in-kind and financial incentives for the ultra-poor people. The project may be funded through a minuscule levy in addition to the toll collected for the maintenance of massive infrastructure projects.
The investment of accumulated pension funds with due risk management is a delicate task. Only a group of people with integrity can safeguard the people’s interest. The unit entrusted with the responsibility should maintain coherence, stability, and sanctity. There are umpteen instances of poor governance and financial irregularities in Bangladesh, with financial units dealing in Ponzi schemes. The consequences of such a massive scale of corruption on the accumulated funds in UPS could be a substantial financial burden on the country’s fiscal health. The institutional and legal framework should contain specific terms of reference to ensure transparency and be careful in routine monitoring or reporting to the stakeholders. It is more appropriate to initiate the scheme in a disaggregated way such as for garments; BGMEA and textile units BTMA; either as separate entities or as a single entity with proportionate representation. Likewise, pension schemes for the migrant workers may be entrusted to Bangladesh Overseas Employment and Services Limited [BOESL].
The experience of other countries may be an effective guide for such a herculean task. World Bank reports forcefully advocate moving to a three-pillar approach:
▣ A mandatory publicly managed pillar with the limited goal of reducing poverty among the elderly
▣ A mandatory privately operated pillar providing fully funded pensions
▣ A voluntary savings pillar
The government should carefully work out ways for an effective partnership with different units entrusted with the welfare of skill-specific workers who should maintain historical data on employment status.
The writer is the Treasurer and a Professor at the School of Business and Economics, United International University. He may be contacted at obaidur@ eco.uiu.ac.bd.
