The Central Board of Trustees of the Employees’ Provident Fund Organisation has streamlined regulations pertaining to partial withdrawals and their timelines. The new regulations have categorised the existing 13 reasons for withdrawals into three broad categories: “Essential Needs”, such as illness, education and marriage; “Housing Needs”, and “Special Circumstances” for which no specific reason is to be given. The first such withdrawal can be done after 12 months of service under the new regulations as compared to the earlier rule of completing 5 to 7 years of service. The rules also stipulate that the employee has to maintain a minimum balance of 25% of the individual’s contribution in the fund. This streamlining is to enable an employee to have easier access to liquid funds for personal use without having to take recourse to more expensive bank credit or informal sources. The number of instances of such withdrawals that can be made have been increased too — 10 times for education and 5 times for marriage.
In a nation that does not have strong social security measures — India’s pension system has occupied the lowest rung in global rankings — the EPF represents a form of forced savings wherein the employer is obliged to set aside money for the fund. Giving easier access to less costly funds might have merits; but it can have adverse consequences too. Employees with low and uncertain incomes might be tempted to indulge in frequent withdrawals that will deplete their post-retirement savings. This is due to what economists refer to as 'time preference' where an individual prefers consumption today over consumption in the not-too-near future. If employees with lower incomes frequently withdraw money from the fund, post-retirement benefits will decrease, leading to greater vulnerability in the face of uncertainties. Moreover, as one ages, the ability to earn after retirement from service diminishes rapidly. Tightening withdrawals to enlarge the post-retirement kitty thus makes sense. Clearly a fine balance has to be established. One way to achieve this is to re-examine the purposes for which withdrawals are allowed. Two examples will suffice. Under the Special Circumstances category, doing away with any compelling reason is avoidable. Similarly, allowing 5 withdrawals for the purpose of marriage needs to be reviewed. In India, where social status is assessed on the basis of spending during a marriage, and where the malfeasance of dowry has not been completely wiped out, the government may want to signal its disapproval for large-budget weddings. The other categories of illness, housing or education are much more fundamental than opulent marriages or unspecified special circumstances.