Multi-Contributor Social Security: Time to reimagine social security contributions

Social security in India faces two main problems – coverage and financing.

It was recently in the news that the Employee State Insurance Corporation (ESIC) is considering extending its coverage to unorganised and gig sector workers. On July 24, 2023, Rajasthan became the first Indian state to pass a legislation aimed at providing social security benefits to gig workers. These are part of various attempts that governments have been making to extend social security beyond just the formal sector.

Social security in India faces two main problems – coverage and financing. It covers mainly the organised sector, leaving out gig workers, unorganised sector workers, etc. Even within the organised sector, around 53 percent do not have any social security benefits, as per the Periodic Labour Force Survey (PLFS) report. In fact, more than 90 percent of India’s workforce is engaged in informal employment. Even the National Pension System (NPS), theoretically open to all, has very poor coverage – only around 6.2 crore subscribers as of March 2023.

The other problem is of inadequate financing. Social security in India is either tied to employers, or borne by the government through systems like the NPS and the Old Pension System (OPS) which is a Defined Benefits system with no contribution from employees. Sundry government schemes for unemployment allowances, insurance, etc. are a strain on government resources. For instance, around 9 percent of the central government’s revenue and 19 percent of its expenditure go towards pensions.

There is, therefore, an urgent need to reimagine our social security system to make it more broad-based in its coverage and open to contribution by multiple sources.

It is time to redefine the “social” aspect in our social security framework.

What Is A Multi-Contributor Social Security Account?

As Nitin Pai wrote here and here, imagine if any person could designate one of his bank accounts as his Multi-Contributor Social Security (MCSS) account. Multiple entities, i.e. the Central and State governments, employers, employees, philanthropists, charitable organisations, companies (as part of their Corporate Social Responsibility - CSR) and individuals should be able to contribute directly to this designated MCSS account. They in turn could get tax benefits for their contributions. We can use the JAM (Jan Dhan - Aadhaar - Mobile) trinity to increase the penetration of these accounts.

The MCSS account will have two components:

* A long term/special portion for pension and defined big expenses like wedding, medical emergencies, studies, home loans, etc.

* A short-term portion for immediate expenses, insurance payments, etc.

There could be a small portion kept aside for investment purposes into mutual funds, government bonds and the like. However, the aim of this system being social security, this portion will have to be kept very small so as to reduce the associated risk.

To make it more attractive and customisable for contributors, they should be able to search for individuals and groups filtered out based on criteria like age, income, livelihood sector, specific needs, employment status, etc., and have the option to specify the purpose of their contribution. For instance, contributors can specify that their contribution be used only for paying life insurance premium. MCSS bank account holders should also be able to specify their granular needs.

To encourage competition, this MCSS account should be transferrable and interoperable across different providers or banks. However, while the bank account may change, the MCSS unique id will not, which will ensure continuity and seamless service across different providers.

Income tax on the money held in this account can be applied at a lower rate or we can think of making it non-taxable. In both cases, there will be some concerns around money laundering and tax evasion. We need proper auditing, KYC norms and income tax returns processing mechanisms to deal with this.

We can have other sorts of benefits also attached with how the user uses the money in his account. For e.g., if a user uses the money in his MCSS account for purchasing education vouchers or for higher education, he can be given income tax benefits.

Designing The MCSS Platform

As described above, this system has to be very flexible and customisable. Due to its complex nature, it would be better to have this exposed via a middleware/platform; maybe as an India Stack open network. In the alternative, we could just define the protocols, standards and minimum basic functionalities, and allow private sector entities to develop it.

Building it out as a middleware/platform will ensure faster adoption of this across the ecosystem. Banks, which will do all the money handling, could just plug in to this network for the other functionalities. The MCSS unique id can also be plugged into the UPI/NPCI system so that the MCSS unique id itself could be used to make transfers to the underlying bank account.

Who should be the regulator for this system? There’s RBI for the banking part, PFRDA for the pension part and SEBI for the investment part, or a single entity with representation from each of these.

This entire reimagined social security system is intended to make it easier for contributors to discover and connect with intended recipients, and to create a system which is not tightly coupled with an employer. Instead of the myriad social security schemes, we could use that money to do direct transfers to these MCSS accounts. This would really open up possibilities.

Imagine you being able to tip your regular Swiggy delivery person directly into his MCSS account, towards his retirement corpus. Companies could get more innovative with their CSR activities. This could also open more avenues for private philanthropy, especially family and retail philanthropy.

MCSS could be the way to open up the system at a very micro level, to make the discovery and social connection process simpler and easier, and to “social/crowd”-fund social security.

Arindam Goswami is a software professional and a Research Scholar at The Takshashila Institution. Views are personal, and do not represent the stand of this publication.