Prime Minister Questions The Viability Of Unfunded Pensions
Hema Senanayake
Prime Minister is of the view that unfunded-liability pensions cannot prevail. But trade unions want to keep intact the present non-contributory pension for public sector employees who would be recruited from January 2016 onwards too. This still is an unresolved budgetary proposal.
However, the government has agreed not to go ahead with that particular budgetary proposal until the proposal is renegotiated with trade unions and agreed upon. Trade unions do oppose to the contributory system. Trade union leaders vowed to launch nation-wide strike again if the government would not withdraw the proposal.
Addressing this particular issue in his special speech made to parliament on 14th December, P.M. pointed out that the present pension system is a system of unfunded-liability and the government has proposed to change it to a system of funded-liability system only for the new recruiters. If this is the theory behind this proposal then unfortunately I am not agreeable with it. Why?
Before, I explain it let us just have a look about the system available for private sector employees in order to ensure their old-age income security. The system is very peculiar. There is no pension for them. Instead they are paid back their own savings in EPF and ETF together with accrued interest when they retire. EPF and ETF are just saving programs not pension programs. Out of the money they get from EPF and ETF they can deposit up to Rs. 1.0 million in a bank and would receive 15% rate of interest per annum, whereas the market rate of interest is around mid-single digit. The difference between the market rate and the mandatory 15% interest is reimbursed to the bank by the Treasury and this too is unfunded liability on the part of the Treasury in ensuring an income for senior citizens.
Then again, the government previously told in parliament and outside the parliament that the government wanted to completely do away with the private placements in issuing government bonds, because EPF and ETF are benefitted by securing higher rate of interest when the bonds are issued through auctions. Formerly, in issuing bonds the Central Bank used public auctions and the mechanism of private placements in order to keep the rates within the macro economically desired levels and as a result low rates of interest became the new normal towards the end of 2014. Low rates of interest are good for the growth of the economy but bad for the EPF and ETF. Now, what would you do? Would you keep the rates low to promote economic growth or would you let the rates to go up to save EPF and ETF? Read More
