Universal Pension Scheme: Some Concerns

Pension scheme starts its journey Participants are yet to turn up in many. Past experience with savings certificate May hamper pension fund's target.

Universal Pension Scheme has started to get lukewarm response. So far around 8000 people registered for the scheme. The scheme has four categories: Probash(aimed at NRB and migrant workers),Progoti (aimed at private sector employees), Somota(aimed at underprivileged people who are not subscribed to any of the social security programs) and Surokkha.

Participant has to contribute for at least 10 years to avail the pension benefit. Though the program has been launched under the banner of “Social Protection Scheme”,cash-strapped govt's desperate search for financing the budget deficit has also come under scanner. Back in January this year in a piece titled “Universal Pension Bill: Could It Really Take Off?” and in February in another piece titled “Premature Social Security Program” I argued why the scheme is premature. Sharing parts of it aagain:

But the program is introduced at a moment when government is facing liquidity crisis. In addition ,budget deficit keeps growing. In 2020,budget deficit was 4.9% of GDP. In 2022,it reached 6.2%. To finance deficit govt borrowed both from internal and external sources. Government borrowing from banks was 2.25% in 2022. Meanwhile, our debt to GDP ratio was around 12% in 2022¹.So in the election year,universal pension program aims to draw voter attention and to bring vital money into the banking system. In developed countries, pension funds are huge. As such funds lie in the banking system for a prolonged time, govt is hoping to use the fund to finance development projects by borrowing from the banks. One member of the Parliament quite rightly laid bare govt intention,saying that people would not be fooled by trusting again this government who emptied the banks. As the deficits get widened,our output will be lower. Our major markets across the globe are in recession. So savings will be lower in the long run. Thus government’s plan to raise savings through pension fund may not go as smoothly as it conceived at the initial stage.

Household’s ability to spend will deteriorate further in the wake of inflation, loss of income and further fall of Taka in the future. So, how many of the people outside institutional job market will participate in this program is a matter of serious scrutiny.²

People’s experience with national savings certificate is not good. Inflation made them net loser at the end of the day. Sloppy management of the economy is also to blame. So pension scheme may not create the enthusiasm among people.

It is interesting that govt has not fixed yet the amount it will pay to the pensioners but fixed the contribution amount. It somehow calls into question cash-strapped government’s intention.

Earlier govt planned to float Bangla Bond/sovereign bond in the London Stock Exchange.Corona threw cold water into it. Govt earlier also instructed quasi-state and independent organizations to disclose funds at their disposal.Interestingly, many quasi-state organizations like BPC withdrew their funds from some problem ridden banks, weakening further portfolios of the banks. This indicates the level of confidence people and organizations have on govt.

Govt is pretty determined to emulate the West except its accountability and moral standard . Govt earlier had changed Bank ownership act(later fixed to unlock IMF credit) citing example of the USA where family members own a bank and many banks with one brunch. But in the USA fraud like Bernie Madoff spends rest of his life in jail. This example has yet to be emulated here. ³

Govt is mulling to invest the money initially into treasury bill and bond. Apart from that a fund management committee will explore ways for secure investment⁴. However, as mentioned earlier, people’s experience with savings certificate is not good. Govt changes its condition at its whim. Moreover, lack of accountability promotes misuse of resources. I have been using teletalk,a state-backed cellphone operator, for a long time as it is cheap compared to other operators. I have fallen victim of uncarried data and lost bonus points that I purchased through my hard-earned money. I lodged complaints to respective authority with no avail. If this lost and uncarried data fell to wrong hand/were misused ,then this was a tremendous loss to state resources and might be used to detrimental activities. Recently, absence of regulatory grip on volatile consumer market and series of scams in public infrastructure projects expose that public money is not being used wisely and appropriately. ⁴

Pension scheme is indeed a good and laudable move. But it is still a premature concept in the context of Bangladesh where governance is in tatters and ruling regime seldom thinks about welfare of the depositors. When a regime is pretty sure about its assumption of and exit from power, it bothers little about ordinary depositors’ interest and at the end of the day the country and economy pay the the cost.³

Notes And References

1. Bangladesh Bank
2. “Universal Pension Bill: Could It Really Take Off?”,Rezaul Hoque,January 27,2023.https://hoquestake.blogspot.com.For more read at https://hoquestake.blogspot.com/2023/01/universal-pension-bill-could-it-really.html?m=1
3. “Premature Social Security Program”,Rezaul Hoque,February 27,2023. https://hoquestake.blogspot.com.For more read at https://hoquestake.blogspot.com/2023/02/premature-pension-scheme.html?m=1
4. ”Biniyog Hobey Treasury Bill Ebong Bondey(Investment In Treasury Bill And Bond)”,Daily Prothom Alo(P-11),August 30,2023.

Premature Pension Scheme

Pension scheme about to start its journey Govt has yet to fix pensioner’s money. Past experience with savings certificate May hamper pension fund's target.

Nitty-gritty of the universal pension bill has gradually been revealed. Govt has decided to launch it from July 01. Bangladeshis aged between 18 years and 50 years are eligible to take part in this scheme. Govt has yet to form a National Pension Committee to manage the fund.After that quasi-state and independent organizations could take part in this scheme. According to a news report,lowest monthly fee could be Tk 500.The monthly amount will fetch Tk 60 billion per year¹. But ministry of finance hopes to form an annual pension fund even bigger than that because those who can pay more could eventually pay a fee more than Tk 1000/Tk 2000.

One of the good things about this pension scheme is that participant could draw credit of upto 50% from this fund if participant needs to use pension fund before maturity. In my January 27 piece titled “Universal Pension Bill: Could It Really Take Off?” I argued that raising savings through pension fund may not go as smoothly as govt intended at the initial stage.

As deficits get bigger and bigger,our output will be lower. Our major markets across the globe are in recession.So our savings will be lower in the future². Household's ability to spend will deteriorate further in the wake of inflation, loss of income and further fall of taka. So how many of the people outside institutional job market will take part in this program is a matter of serious scrutiny²

.

People’s experience with national savings certificate is not good. Inflation made them net loser at the end of the day. Sloppy management of the economy is also to blame. So pension scheme may not create the enthusiasm among people.

It is interesting that govt has not fixed yet the amount it will pay to the pensioners but fixed the contribution amount. It somehow calls into question cash-strapped government’s intention.

Earlier govt planned to float Bangla Bond/sovereign bond in the London Stock Exchange.Corona threw cold water into it. Govt earlier also instructed quasi-state and independent organizations to disclose funds at their disposal.Interestingly, many quasi-state organizations like BPC withdrew their funds from some problem ridden banks, weakening further portfolios of the banks. This indicates the level of confidence people and organizations have on govt.

Govt is pretty determined to emulate the West except the accountability and moral standard. Govt earlier had changed Bank ownership act(later fixed to unlock IMF credit) citing example of the USA where family members own a bank and many banks with one brunch. But in the USA fraud like Bernie Madoff spends rest of their lives in jail. This example has yet to be emulated here.

Pension scheme is indeed a good and laudable move. But it is still a premature concept in the context of Bangladesh where governance is in tatters and ruling regime seldom think about welfare of the depositors. When a regime is pretty sure about its assumption of and exit from power, it bothers little about ordinary depositors’ interest and at the end of the day the country and economy pay the the cost.

Notes And References

1. ”Mashey Sorbonimno Chandra Hotey Parey Panchsho Taka(Lowest Monthly Contribution Could Be Tk 500)”,Daily Prothom Alo,P-12,February 15,2023.
2. ”Universal Pension Bill: Could It Really Take Off?”,Rezaul Hoque,https://hoquestake.blogspot.com. For more see at https://hoquestake.blogspot.com/2023/01/universal-pension-bill-could-it-really.html?m=1

Universal Pension Bill: Could It Really Take Off?

Parliament passed universal pension bill There is a budget deficit to fill. Low output and trust Will not raise the savings fast And may not bring pace to economy’s wheel.

Last week Bangladeshi Parliament gave its nod to universal pension bill. People between 18-year and 50-year are eligible for participating in this program. However, the program has raised lots of questions. Back in July last year, I wrote a piece,titled “Do We Need Social Security Programs?”¹, about futility of carrying such program in Bangladesh. Sharing parts of it again:

Argument put forward in favor of raising social spending is that in many developed economies social security spending occupies a decent share of GDP and in Bangladesh it is still below 3%.

In many of these developed economies, public opinion,petition lead the public representatives to scrutinize opaque issues,to summon concerned people at the Parliament to offer explanation. And the free press is allowed to broadcast and print details of the hearing. In Bangladesh that never happens. There are privileged people who roam scot free and hardly have any accountability. And a section of press,capable of manufacturing « narrative », keeps disseminating disinformation to maintain status-quo.

In many of these developed economies, unemployment rate is pretty low and they have a concept of social contributions apart from income tax.In a country of 160 million where we have only 7.5 million registered taxpayers,this idea of social contribution is alien. Many here enter job market pretty late. And prospect of job at private sector is pretty uncertain as ruling elites dominate the business. In the wake of regime change or corruption, many found themselves in the club of unemployed. In addition, a large part of our workforce involved in informal sector where scope for saving or making social contributions is very minimal. In developed economies, people contribute to government fund very long time to receive benefits during their post retirement age.In Bangladesh that kind of prospect is very bleak as very few could manage to do so. Here govt finances the social security programs through indirect tax,borrowing from banks and abroad.People’s participation in social contributions is absent. And most of this tax money falls into wrong hands. To sustain a government-run social security program,government has to collect contributions from many people just to give benefit to one retired person. But the concept of ratio of active age to retired age population and intergenerational transfer ²are not working in Bangladesh as we do not have well functioning institutionalized job market. One solution is to call for voluntary support to social security fund.

Govt may float social security bond,starting from TK 100. Those who are interested may buy these bonds using NID card. And NBR will track the number of bonds held by each NID. Based on the amount of one's contribution, one individual may receive a certain sum during his post retirement life. Government may also add fund to it. For instance, if social security bond fetches TK 100 crore. Government may contribute another TK 100 crore and distribute the money among the target population. Government may also launch a lottery to finance the program,more plausible than the social security bond. 5% of lottery buyers have chance to win some prizes while 95% will have the feel good factor. The point is if you really want social security then you have to contribute to it. Government in no way is going to pay fully the whole social security spending.

The bill has made it clear that to avail pension one has to contribute to the pension fund pool for at least 10 years. At the age of 60 or the retirement age,one will receive the pension amount. But the program is introduced at a moment government is facing liquidity crisis. In addition ,budget deficit keeps growing. In 2020,budget deficit was 4.9% of GDP. In 2022,it reached 6.2%. To finance deficit govt borrowed both from internal and external sources. Government borrowing from banks was 2.25% in 2022. Meanwhile, our debt to GDP ratio was around 12% in 2022³.So in the election year,universal pension program aims to draw voter attention and to bring vital money into the banking system. In developed countries, pension funds are huge. As such funds lie in the banking system for a prolonged time, govt is hoping to use the fund to finance development projects by borrowing from the banks. One member of the Parliament quite rightly laid bare govt intention,saying that people would not be fooled by trusting again this government who emptied the banks. As the deficits get widened,our output will be lower. Our major markets across the globe are in recession. So savings will be lower in the long run. Thus government’s plan to raise savings through pension fund may not go as smoothly as it conceived at the initial stage.

Household’s ability to spend will deteriorate further in the wake of inflation, loss of income and further fall of Taka in the future. So, how many of the people outside institutional job market will participate in this program is a matter of serious scrutiny.

As govt is mulling to offer ration card to 10 million vulnerable families, it is better to downsize/abolish other social programs. At the end of the day,money well spent or lost belongs to people. I think in the face of rising budget deficit and rampant corruption in the financial sector, this universal pension program will not garner much attention. Only government with popular mandate can float and initiate such social security program. For that a transparent and acceptable election that will promise to improve the governance situation is a must.

Notes And References:

1. ”Do We Need Social Security Programs? “,Rezaul Hoque,https://hoquestake.wordpress.com ,June 16,2022. For more read at https://hoquestake.blogspot.com/2022/06/do-we-need-social-security-programs.html?m=1
2. “Macroconomics”,Rudiger Dornbusch,Stanley Fischer,Richard Startz,7th edition,McGraw-Hill.
3. Bangladesh Bank