Is the proposed pension scheme really universal?
The government is set to launch the Universal Pension Scheme nationwide in the current fiscal year. Under the proposed scheme, beneficiaries can enjoy pension benefits subject to the payment of subscription up to the age of 60 years if they enrol at the age of 18-50 years, whereas those who enrol at above 50 years will have to pay a subscription for a minimum of 10 years.
As the proposed pension scheme requires monthly contributions even from the lower income groups, here we would like to briefly evaluate this scheme against the principles of International Labour Organization (ILO) to see if the pension system is really universal or not by design. Since its foundation in 1919, the ILO has played a key role in the global development of social security systems, including pensions. A majority of pension systems around the world have been designed with technical assistance provided by the ILO.
The main objective of the public pension system is to ensure income security for the elderly, preventing poverty and reducing inequality. The ILO has elaborated a core set of principles to design pension systems, which can be grouped into three overarching objectives of pension systems: coverage, adequacy, and sustainability.
A comprehensive pension system should guarantee income security to everyone of old age. This principle of universality is embedded in various human rights instruments, including the Universal Declaration of Human Rights. There are two important dimensions to the adequacy of pension systems: horizontal and vertical. Considering the horizontal dimension, a pension system should guarantee a minimum level of adequacy for everyone when they reach old age, regardless of their work histories. The vertical dimension considers that a pension system should provide benefits that are adequate relative to previous lifetime earnings. Pension systems also need to be built in a way that is socially and financially sustainable, i.e. it can achieve coverage and adequacy in the future in a way that is financially sustainable.
To meet these diverse objectives, ILO recommends establishing a multi-tier or multi-pillar pension system. The core rationale for multiple tiers is that pension systems serve different people in a diverse range of circumstances at different moments of their lives. A multi-tier pension system consists, in most cases, of a flat, tax-funded base pension (Tier 0); a mandatory, earnings-related contributory pension (Tier 1); and supplementary pension plans (Tier 2). Tier 0 is a non-contributory pension scheme, financed by the government general budget, under which a flat amount is provided to everyone who has reached the age of eligibility, or to those who have reached the age of eligibility but does not receive other kinds of pension. It should guarantee a minimum level of income, with adequate levels of benefits, for a life in decency and dignity. Tier 1 is based on an earnings-related contributory scheme. The ILO recommends that Tier 1 scheme be a defined benefit scheme financed on a pay-as-you-go or partial funding basis. Tier 2 consists of mostly a voluntary, supplementary contribution pension component to allow individuals to achieve even higher levels of benefits.
According to the ILO, tax-funded, non-contributory Tier 0 pensions are the only way to cover many of those who are in informal employment and do not have the capacity to contribute during their working lives. The other tiers will not be able to cover the majority of the population in the foreseeable future, due to the large informal economy.
The experiences of Thailand can be a lesson for Bangladesh. Until 2009, Thailand's pension system included several contributory schemes for government officials, private sector employees and informal economy workers. However, coverage of the latter group was very limited. Overall, only 20 percent of older persons had access to some level of protection. Only after introducing a non-contributory old-age pension in 2009 did Thailand reach universal coverage.
Now, if we compare the proposed pension scheme in Bangladesh, we can see that though it is termed "universal," a critical component of the Universal Pension Scheme is missing in the design – the Tier 0 scheme. In order to get coverage under the proposed scheme, one has to pay a fixed amount of premium for at least 10 years. The contribution for non-resident Bangladeshis and individuals from the informal sector will range from a minimum of Tk 500 to a maximum of Tk 5,000 per month. The monthly contribution for private sector employees is likely to be set from a minimum of Tk 1,000 to a maximum of Tk 5,000. The government will contribute 50 percent to the monthly deposits of the insolvent individuals and will have no contribution towards the rest. Pension scheme holders will receive interest from the government against their contributions. This means that the proposed pension scheme is probably a contributory Tier 2 system with very low government contribution.
The question is, will the low-income groups be able to contribute their part in the proposed pension scheme? Is it fair to take contributions from the low-income groups while civil servants get pensions without any such contribution? The experiences of Thailand can be a lesson for Bangladesh. Until 2009, Thailand's pension system included several contributory schemes for government officials, private sector employees and informal economy workers. However, coverage of the latter group was very limited. Overall, only 20 percent of older persons had access to some level of protection. Only after introducing a non-contributory old-age pension in 2009 did Thailand reach universal coverage.
In order to meet the similar objectives of achieving both horizontal and vertical dimensions of coverage, different countries implement different combinations of multi-tier schemes. For example, according to the ILO, in Canada, all older persons receive a benefit from the universal non-contributory Old-Age Security pension (Tier 0). Voluntary occupational pensions (Tier 2) and other private savings (Tier 3) play an important role in this system for providing income replacement to those with relatively higher earnings. In Sweden, the core component of the pension system is an earnings-related, pay-as-you-go, notional defined-contribution scheme (Tier 1). But those with no or low pension income are eligible for the Guaranteed Pension (Tier 0), which tapers away for those with higher pension income. In Portugal, the pension system is oriented towards a mandatory defined-benefit scheme (Tier 1). The social pension (Tier 0) is provided to older people who are not covered by any contributory social insurance scheme.
It is noteworthy that all these pension systems may have different mechanisms, but one component is common: all have a non-contributing Tier 0 scheme to guarantee minimum income security to all older persons, thus achieving the horizontal dimension of pension coverage. This is particularly important in Bangladesh, where large informal employment and poverty mean that significant portions of the working population are not in the position to join a contributory scheme. So, in order to make the proposed pension scheme truly universal, a Tier 0 non-contributory part must be included.
Kallol Mustafa is an engineer and writer who focuses on power, energy, environment and development economics.