How to finance universal pension scheme for 17 crore people?

In many low and middle-income countries, the earnings-related pension scheme is restricted to the relatively well-off – civil and defense personnel. Pension schemes for elderly people in this region were first adopted in 1924, but it was only for the civil and military services. Subsequently, employees of some sector corporations also included in the program.

The number of government servants is now around 1.4 million, which accounts for only 5% of the total employed population.  The population in private employment has abysmally small (almost nil) pension coverage. Additionally, workers from the agricultural sector constitute about 50% of the total employment and contribute about 40% share of the total GDP. Despite the size, this sector also does not have a pension system.

Bangladesh follows the unfunded pension system where the government pays its former (retired) employees mainly from budgetary revenue. The burden relies solely on the taxpayers. The escalating cost of pensions for civil servants is becoming a growing concern in many South Asian countries as it crowds out higher-priority spending aimed at accelerating growth and poverty reduction. Bangladesh at present incur about 40% of the revenue budget for payment pension to the retired government officials. 

Different study has projected that the number of people over 60 years of age has been projected to increase from about 9.8 million (6.5% of total population) to 18.1 million (10% of total population) by 2026 and 44.1 million people (20.2% of total population) by 2051 in Bangladesh. The average life expectancy is now around 73 years, which will result in an increased dependency ratio and declining potential support ratio. Without adequate savings or contributory pension schemes, most senior citizens will be heavily dependent on children and other family members.

Article,15 (d) of the Constitution given the right to citizen for social security, that is to say, to public assistance in cases of undeserved want arising from unemployment, illness or disablement, or suffered by widows or orphans or in old age, or in other such cases. At present, there is no formal universal pension system in Bangladesh at a national scale for entire population. It is going to change for the first time in Bangladesh.

At present The Provident Fund Act 1925 is for the pension of the government employees and not does not cover private sector pension etc. There are some rules under the act such as General Provident Fund rule 1979 and the Contributory Provident Fund Rule 1979, the government and autonomous bodies employees benevolent fund and group insurance rule, 1982, The Financial Institution act 1993 for employees of the government and autonomous bodies including nationalized banks.  In the proposed scheme excludes the employees of government, semi-government and autonomous organizations from the scheme until the pension authority, i.e. the government issues gazette in this regard.  

The government has published the draft National Pension Authority Act, 2022 and proposed primarily a self-contributory pension scheme for citizens with age ranging from 18 to 50 years having National Indemnity Card (NID), who are living in home or abroad. After paying a certain amount of deposits for 10 consecutive years under the Universal Pension Scheme and at their 60, the individuals will be given pension against the accumulated deposits. The spouse of an eligible pensioner will enjoy pension benefit s/he dies at 75. If any pension scheme holders die before paying subscription for at least 10 years, they will get their deposited money with interest. 

As per the draft act, none will be able to withdraw their deposited money under the scheme but will be able to draw 50 per cent as loan against the deposit and the repayment of the loans will be deposited to the pensioner account.

As per standard practice there are three pillars in pension schemes practices in different countries: (1) Non-contributory (basic pension) (2) Contributory (forced savings) (3) Contributory (voluntary savings). Bangladesh already has basic pensions for civil and military personnel’s non-contributory basic pension and the proposed scheme is voluntary, self-contributory (but not forced savings) scheme for common citizens.

The pillar 1 is an anti-poverty pillar that is noncontributory and guarantees a minimum income in old age. The pillar 2 is a forced savings pillar that provides benefits only to contributors, and, in general, provides the most benefits to those who contribute most. The two mandatory pillars differ only in whether benefits are flat, or related in some way to contributions. Pillar 3 is a voluntary savings pillar, available to anyone who cares to supplement the retirement income provided by the first two pillars.

The first pillar protects the elderly from absolute poverty and the second two pillars protect them from relative poverty who can contribute at a working age but need support at old age. The primarily proposal is some where like pillar 2 but participation is voluntary to join the scheme. Bangladesh may consider introducing all three pillar scheme in due course.

Regarding management, the authority of the scheme will remain completely under government control and not an independent authority and audited by Comptroller of Auditor General of Bangladesh (CAG). The employees have also given protection Code of criminal procedure 1860 and there is a possibility of corruption and mismanagement in the authority. The account should be audited by independent auditor not CAG. It should be an independent authority / trust and independent from government control for efficient performance.

As per proposed law under section 11 (ga) the employees of the government and autonomous bodies will remain out of this scheme since they already enjoy the benefits. There is no clear indication whether government has a plan to unify all the pension schemes under a single law unifying the schemes under Provident Fund Act 1925 and the draft National Pension Authority Act, 2022 for some Universal Pension Schemes (such as 3 pillars schemes) for all citizen irrespective of employment. This will be a welcome decision for fair distribution of benefits to all the citizens irrespective of profession to make Bangladesh as a real welfare state.

Bangladesh has several successful welfare trusts for retired defence forces, Ansar force and policy personnel etc. Government had handed over many nationalised industries to these trusts. Recently, these trusts have been given permission of operating Banks and Insurance companies. Government may also consider allowing the pension fund to operate such secured and profitable business. Government may constitute the pension scheme based on experience of those welfare trusts and reduce dependency on revenue budget for the proposed universal pension scheme and cover the entire population in very short period of time. The scheme should be under independent welfare trust without political and bureaucratic control so that all the citizen irrespective of cast, creed, profession and political identity may get pension at the age of 60 as proposed in the draft law.

The writer is a legal economist. He can be contacted at [email protected]