Why in News ?
- The Employees’ Provident Fund Organisation (EPFO) has proposed easing withdrawal norms to make it simpler for workers to access funds for essential needs (like illness, education, or unemployment).
- However, high withdrawal rates during employment are depleting what should serve as post-retirement security, prompting EPFO to propose changes in 2025–26.
Relevance:
- GS-2 (Governance & Social Policy): Social security, EPFO regulations, labour welfare.
- GS-3 (Economy): Pension architecture, financial literacy, informal workforce challenges, policy reforms.
Key Issue
- Frequent premature withdrawals erode the retirement corpus meant for long-term financial security.
- EPFO data (FY 2017–2025) shows a sharp rise in withdrawals for illness, education, marriage, and unemployment.
Data Insights from EPFO (2017–2025)
1. Withdrawals for Essential Needs
Trend:
- 16-fold increase in illness-related withdrawals (2017–25).
- 3.5x increase in marriage/education-related withdrawals.
- Indicates withdrawals are becoming routine rather than emergency-based.
Overview
- Steady increase in final settlements shows rising job exits or migration.
- Nearly 95% of settlements are due to unemployment, not retirement.
Employment Profile & Structural Concerns
- 65% of EPFO members earn less than ₹15,000/month.
- Average member balance < ₹20,000; nearly 75% have < ₹50,000.
- Indicates a low-wage, informalized workforce with poor long-term savings capacity.
- Over 3 crore contributing members; 7 crore accounts but only ~2.6 crore active.
Implication:
- Large proportion of accounts remain dormant.
- Low-income earners withdraw repeatedly for short-term needs, eroding pension benefits.
Causes for Frequent Withdrawals
- Health emergencies (especially post-COVID-19).
- Marriage and education expenses (cultural and social priorities).
- Unemployment spells and job insecurity.
- Lack of financial literacy—workers view EPF as savings, not as pension.
- Ease of partial withdrawal norms post-2017 reforms.
EPFO’s 2025 Proposal
- Current rule: Minimum 2 months unemployment required before settlement.
- Proposed change: Cut to 1 month, but limit withdrawal to 25% of balance to preserve long-term savings.
- Aims to balance liquidity needs vs. pension protection.
Broader Socio-Economic Implications
- Financial insecurity in old age: Early withdrawals deplete pension corpus.
- Labour market fragility: Reflects short job tenures, retrenchments, and informal transitions.
- Policy challenge: Need to design instruments combining liquidity + longevity protection (e.g., NPS-EPFO convergence).
- Women and low-income workers particularly vulnerable due to intermittent employment.
Conclusion
- India’s retirement savings architecture is weak — less than 10% of workforce has formal social security.
- EPFO withdrawals ≈ financial stress index — spikes correspond with economic disruptions (e.g., COVID-19, layoffs, inflation).
- The 2025 reform proposal aligns with ILO’s Decent Work Agenda and SDG 8 (Decent Work and Economic Growth) by promoting financial resilience and social protection.
