i

Kathmandu University School of Management

(Analytical Study of Contribution Based Social Security Act)

A Term Paper submitted to Dr. Hari Sharan Chakhun, Faculty (KUSOM)

(In partial fulfillment of the requirements for the)

Legal Environment for Business in Nepal (GEM 502)

Submitted by:

Bindu Gaire Sharma (20328)

MBA (Spring 2020)

August 2, 2020
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Acknowledgement

First of all I would like to articulate my sincere gratitude to Kathmandu University School of
Management for incorporating Legal Environment for Business in Nepal as a part of our course
which provides a great insight on legal aspect governing businesses. This report entitled
“Analytical Study of Contribution Based Social Security Act” aims to understand the social
security system of Nepal especially social security programs under contribution based.

I would also like to extend my sincerest gratitude to Dr. Hari Sharan Chakhun, faculty of
Kathmandu University School of Management for his guidance, time and support in the due
course. In addition to above key person, I would like to take this opportunity to thank all the
other people who contributed for the completion of project. I have tried to include all the
relevant information regarding this topic of my report.

Bindu Gaire Sharma

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Table of Contents
CHAPTER ONE: INTRODUCTION...........................................................................................1
1.1. Background of the Study Including History in Brief......................................................1
1.2. Objective of the Study....................................................................................................3
1.3. Limitation of the Study...................................................................................................3
1.4. Literature Review...........................................................................................................4
CHAPTER TWO: CONCEPT OF SOCIAL SECURITY AND CONTRIBUTION BASED
SOCIAL SECURITY....................................................................................................................6
2.1. Social Security....................................................................................................................6
2.2. Contribution Based Social Security....................................................................................6
2.3. Objectives of Social Security..............................................................................................7
2.4. History of Social Security in the World.............................................................................8
2.5. History of Social Security in Nepal....................................................................................9
2.6. Importance of Contribution Based Social security...........................................................10
CHAPTER THREE: EXISTING LEGAL PROVISION OF SOCIAL SECURITY ACT IN
NEPAL........................................................................................................................................11
3.1. Contribution Based Social security Act 2074 (2017).......................................................11
3.2. Contribution Based Social Security Regulations 2075 (2018).........................................15
3.3. Social Security Fund (Management and Operation) Rules, 2067 (2011).........................18
3.4. Social Security Schemes Operation Directives, 2018 (2075)...........................................19
CHAPTER FOUR: INTERNATIONAL SCENARIO OF SOCIAL SECURITY.....................24
4.1. Social Security in USA.....................................................................................................24
4.2. Social Security in China...................................................................................................25
4.3. Social Security in India.....................................................................................................25
4.4. Social Security in Pakistan...............................................................................................26
CHAPTER FIVE: CONCLUSION AND RECOMMENDATION............................................28
5.1. Conclusion........................................................................................................................28
5.2. Recommendation..............................................................................................................29
Bibliography................................................................................................................................31
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EXECUTIVE SUMMARY

Social protection, or social security, is a human right and is defined as the set of policies and
programs designed to reduce and prevent poverty and vulnerability throughout the life cycle.
Increasingly, social security is being considered as a right of the citizen and contribution based
social security is a public social security program that provides protection against various
economic risks like loss of income due to sickness, old age or unemployment. In attempting to
establish a social security system that would protect every workers in the economy, the
government of Nepal has, for most of the time in the past years, focused its effort on setting up
legal framework for contributory social security and planning various programs or scheme to
protect people from employment uncertainties. The Contribution-based Social Security Act was
passed in 2017 closely followed by Contribution-based Social Security Rules in the same year
to enhance the coverage of social security and provide some kind of protection under it to all.

The paper is an analytical study of the Contribution Based Social Security Act 2074 (2017) of
Nepal. This paper also provides a review of approaches that Government of Nepal have
undertaken with enactment of the Contribution Based Social security act. The aim of this paper
is to provide the reader an overview of the current policy, practice and programs on social
security in Nepal through a governance lens. The study is based on secondary data collected
through various resources available on internet.

The paper shows that the government has tried to include both formal and informal sector of
economy in social security. Through the articulation of a social security framework, important
steps have been made by the Government to ensure that social protection is conceived within a
wider and more inclusive social policy framework and one which views social policy and social
protection as key pillars in development. The government has tried to introduce a social
security system that provides the universal coverage of social protection which includes child
benefits, pensions for older persons and benefits for people of working age in case of maternity,
disability, work injury or for those without job. However, government hasn’t been able to
motivate people to register within the fund. As there is no clear picture about the use and
security of the fund people in Nepal still fear contributing in social security.
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CHAPTER ONE

INTRODUCTION

1.1. Background of the Study Including History in Brief

Today’s society is facing a situation which has never been known before along with the
increasing insecurities of life. Therefore, to safeguard every individual and the society
from all these insecurities and uncertainties there is a strong need of social security
whether it may be in form of contributory or non-contributory. “The state shall make
itself responsible for ensuring a minimum standard of material welfare to its entire citizen
on a basis wide enough to cover all contingencies of life from womb to the
tomb[ CITATION ILO42 \l 1033 ].

At present most of the countries have some type of social security system. The most
common form of social security program worldwide is for old-age, disability, medical
and pension among others. Effective social security systems guarantee income security
and health protection, thereby contributing to the prevention and reduction of poverty and
inequality and the promotion of social inclusion and human dignity. This is done through
the provision of benefits, in cash or kind, intended to ensure access to medical care and
health services, as well as income security throughout the life cycle, particularly in the
event of illness, unemployment, employment injury, maternity, invalidity, family
responsibility, as well as during retirement and old age. Therefore, social security
programs is an important investment in the well-being of workers and the community as a
whole.

Historically, crises have played defining roles in developing and strengthening social
security policies. Social security regimes, including the German social insurance model,
the British Beveridge model and the American Social Security model were responses to
emerging social and economic crises (Prasad and Gerecke, 2010). Social security
schemes emerged as automatic social and economic stabilizers during the 2009 financial
and economic crisis. The crisis created an opportunity to extend social security and
 2

recognized it as an essential component of national economic and social development

strategies. Countries at all levels of development, which have social security systems in
place, are in a much better position to cope with the social fall-out of such crisis [CITATION
Pro11 \l 1033 ].

Social protection and social security, which are used interchangeably have drawn
increasing attention in Nepal in recent years. While the pension, gratuity and provident
fund schemes have a long history, several other programs were only recently introduced,
with varying objectives and in an uncoordinated manner. Social security protection in
Nepal progressed over time from initial coverage of the armed forces to the public service
and workers in the private sector. Protection for the army began in 1934 closely followed
by a non-contributory pension scheme for the civil service and in 1944 a provident fund
scheme. Reforms in 1962 amalgamated earlier schemes into the Employees Provident
Fund to provide for the retirement needs of the working population. A new institution in
1990, the Citizens Investment Trust that operated on savings and insurance principles, to
provide protection for all citizens as a way to extend coverage to the other sectors of the
economy was established. As a large section of the aged population, widows and
disadvantaged tribes needed economic support the government introduced allowance for
the elderly, disabled, widows and disadvantaged castes and tribes in 1994. These social
protection programs, affected by conflict, only gained importance with the adoption of
the new constitution in 2015.

Recognition of the valuable contributions of the human resources in economic

development was now enshrined in Article 34 of the constitution under the heading of
“Rights to Labor”. Social dialogue amongst the social partners laid the foundations of
labor rights, which were incorporated in the Labor Act and passed by Parliament in 2017.
The Labor Act not only comprehensively covers all forms of employment it provides
rights to a range of benefits. The rights to rest days, annual leave, medical benefits,
payments for sick leave, maternity, accidents, gratuity, unemployment and old age
retirement are stipulated in law. Alongside with these, payment of wages was regularized,
occupational health and safety became a requirement and the process of dismissal
regulated to enhance industrial harmony. In a follow up to provisions in the Labor Act,
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the Contribution-based Social Security Act was passed in 2017 closely followed by
Contribution-based Social Security Regulation in the year 2018. The Social Security
Fund was given the legal authority to register, collect contributions and administer the
payments of benefits for the contingencies of accidents, sickness, maternity, gratuity,
medical and old age pension[ CITATION Sin19 \l 1033 ].

The Contribution Based Social Security Act 2017 (2074) was enacted as per the social
welfare concept, in accordance with which the people have right to welfare of various
kinds as one of the fundamental rights as enshrined in the constitution. The act has been
enacted to ensure the rights of the workers based on the concept of contributory social
security and to provide social security to the contributors. This paper provides an analysis
of the social security system that is stipulated in the Contribution Based Social Security
Act 2017 (2074). It also discusses the policies and legal framework supporting social
security and overview of the ongoing program. The report focuses in particular on
various categories of workers who comes under the social security system as per the
Contribution Based Social Security Act and how the social security system has benefited
them.

1.2. Objective of the Study

The overall objective of the study is to make an analytical study of Contribution Based
Social Security Act 2017 (1074) of Nepal and the outcome of the social security program
under the act. However, the specific objectives are to:

 Analysis of policy, legal and regulatory context of social security and social
protection in Nepal.

 Examine social security and social protection mechanisms available to the people
under contribution based social security schemes.

 Make recommendations regarding existing gaps, flexibility and coverage of

social security program.
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1.3. Limitation of the Study

The limitation of the study is that the study was predominantly based on secondary
source of data available on the internet regarding the social security system in Nepal.
Therefore, the reliability of conclusions of the study depended upon the accuracy of the
information available on the internet.

1.4. Literature Review

The International Social Security Association has defined social security as any program
of social protection established by legislation or any other mandatory arrangement that
provides an individual with a degree of some income security when faced with income
contingencies of old age, survivorship, incapacity, disability, and unemployment and
parenting children. The development of social security is being supported by various
international conventions and instruments, and the recognition of social security as a
basic human right was enshrined in the 1948 Universal Declaration of Human Rights.

Social Security means the "security of the whole society". With the growth of
industrialization, virtually all work includes some hazards and accidents continued to be
frequent due to association with the handling of machines. These risks to which an
individual in the society is exposed are caused by physical sickness such as invalidity, old
age, maternity, accidents and death and economic factors such as technological change
added burden of large families. So both physical and economic risks deprive in an
individual of his earning power. Social Security occupies an important place in an
industrial society as it takes suitable steps to overcome such hazards and give protection
to the workers against sickness, disease and injury arising out of employment for the
improvement of conditions of labor. Hence we can rightly say that it is a system which is
aimed at bringing all round well-being of society by providing various amenities and
facilities to maintain the conditions of labor in order to remove the unjust conditions of
labor as it imperil the peace and harmony [ CITATION Mah03 \l 1033 ].

All the industrial countries of the world have developed measures to promote the
economic security and welfare of the individual and his family. These measures generally
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have come to be called as “Social Security”, Social security means "freedom from want”.
The quest of social security and freedom from want and distress has been the consistent
urge of man through the ages. This urge has assumed several forms according to the
needs of the people and the level of social consciousness, the advancement of technology
and the pace of economic development. Similarly, the workers needed a justifiable right
to cry for protection against the deplorable in working and living conditions of the
workers as there was no provision for safety, welfare and health. Thus social security was
known for its absence and the concept has been developed to safeguard the interest of
labor. Today the philosophy of the concept is universally acknowledged as it has been
accepted in principle that social security is the aim of all social welfare activities of all
countries following different ideologies, different social, political structures and different
economic policies.

The first systematic attempt to define social security was made by ILO which defines
"Social Security" as “the security that society furnishes through appropriate
organizations, against certain risks to which its members are exposed. These risks are
essentially contingencies against which the individual of small means and meagre
resources cannot effectively provide for by his own ability or foresight alone or even in
private combination with his fellows - these risks being sickness, maternity, invalidity,
old age shad death. It is the characteristics of these contingencies that they imperil the
ability of the working man to support himself and his dependents in health and decency.” [
CITATION ILO42 \l 1033 ]

The Social Security Minimum Standard Convention 102 of ILO mentions nine branches
of social security which include: sickness, maternity, employment injury, unemployment,
invalidity, old age, and death, provision of medical care and provision for families with
children[CITATION Int84 \l 1033 ] .It states that these nine risk factors should be covered by
social security. Social security is thus a primarily social insurance program providing
social protection or protection against socially recognized conditions, including poverty,
old age, disability, unemployment and others. Social security may also entail smoothing
consumption and help in reducing risks or spreading income over the life cycle. Often
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there is a redistribution of income among groups with differing needs [ CITATION Ahm91 \l
1033 ].

CHAPTER TWO

CONCEPT OF SOCIAL SECURITY AND CONTRIBUTION BASED

SOCIAL SECURITY
2.1. Social Security

Social security may be defined as any program of social protection established by

legislation or any other mandatory arrangement that provides individuals with a degree of
income security when faced with contingencies of old age, survivorship, incapacity,
disability, unemployment or rearing children. Social security is a fundamental human
right to which every individual has been entitled as a member of the society. The concept
of social security is a broader term including both social insurance and social assurance.
Social assistance is a non-contributory, tax-financed, regular and predictable cash or in-
kind resources transfers to poor and vulnerable individuals and households.

The Universal Declaration of Human Rights recognizes the right to social security in
article 22, which states that "Everyone, as a member of society, has the right to social
security and is entitled to realization, through national effort and international co-
operation and in accordance with the organization and resources of each State, of the
economic, social and cultural rights indispensable for his dignity and the free
development of his personality.”[ CITATION Nat48 \l 1033 ] The constitution of Nepal 2015
has envisioned social security for the people as a step towards establishing a welfare
society. Constitution of Nepal 2072 Article 43 including others provisioned the right of
social security. The contribution based social security law is an attempt to provide
comprehensive coverage to the private, public and informal sector.
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2.2. Contribution Based Social Security

Social insurance also known as contribution based social security is contributory with
participants making regular payments. The concept of contribution based social security
is that individuals contribute to a central fund managed by governments, and this fund is
then used to provide income to individuals when they become unable to support
themselves through their own labors. Social insurance differs from private insurance in
that governments employ elements of social policy beyond strict actuarial principles, with
an emphasis on the social adequacy of benefits as well as concerns of strict equity for
participants. The benefits, eligibility requirements and other aspects of the program are
defined by statute. Participation is often compulsory for particular groups and covers
costs related to life-course events like maternity, unemployment or illness. It is a scheme
in which both the employee and the employer makes the contribution. Contribution based
social security provides a method for addressing the problem of economic security in the
context of modern industrial societies.

2.3. Objectives of Social Security

Compensation

Compensation is basically related to security of income. It is based on the consideration

that during time one has contingency of risks, the individual and his family should not be
subjected to a double calamity due to destitution and loss of health, limb, life or work. So
the objective of social security is to provide one a compensation mainly in case of
unemployment, disability, health issues and death.

Restoration

Restoration commutates cure of one’s sickness, reemployment so as to restore him/her to

earlier condition. Social security aims to provide various schemes against workplace
injuries so that all the workers could restore back to their earlier employment situation.
Restoration is also considered as an extension of compensation.

Prevention
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The social security provides preventive measures to avoid the loss of productive capacity
due to sickness, unemployment or invalidity to earn. In other words these measures are
designed with the objectives of increasing the material, intellectual and moral well-being
of the community by rendering available resources which are used up by avoidable
disease and idleness.

2.4. History of Social Security in the World

Traditionally, social protection has been used in the European welfare state and other
parts of the developed world to maintain a certain living standard, and address transient
poverty. Organized welfare was not common until the late 19th and early 20th
centuries[ CITATION Soc20 \l 1033 ]. The concept of social security started form the rise of
formal system of economic security. As societies grew in economic and social
complexity, Europe witnessed the development of formal organizations of various types
that sought to protect the economic security of their members. The friendly societies and
the fraternal organizations grew dramatically following the Industrial Revolution. By the
beginning of the 19th century one of out every nine Englishmen belonged to one of these
organizations.

It was during the 20th century, the national social security program developed more
widely around the globe. By the time the United States adopted its first compulsory,
contributory social insurance applicable to a large segment of the working population in
the form of Federal old-age benefits (known today as Social Security) in 1935 AD, some
20 nations around the world already had such a program in place, and another 30 or more
had introduced at least one other social insurance. After the emergence of the Industrial
Revolution, the governments of various countries have been forced to adopt policies and
programs of social security within their respective constitutional set up.

The term social security was first used in the U.S. by Abraham Epstein in connection
with his group, the American Association for Social Security. Initially, Social Security
only paid retirement benefits to the primary worker. Later after changes in the law
survivors’ benefits, benefits for the retiree's spouse and children, disability benefits and
even unemployment fund were added[CITATION Hisnd \l 1033 ]. Today almost all the
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democratic and socialist countries of the world have their own pattern of social security
for a regulated social order. The social security system is one of the characteristic
institutions mainly developed during the 20th Century. Almost all independent countries
have enacted social security measures according to their means and capacity to pay.

2.5. History of Social Security in Nepal

Social security protection in Nepal has progressed over time from initial coverage of
armed forces to the public services and workers in the private sector. The history of social
security in Nepal began with pensions paid to retired and old persons. It is found that a
system to provide annual lump sums to wounded soldiers returning from the British
Army was practiced during the First World War. In 1991 BS, a Military Money Fund was
established, and then Prime Minister Juddha Shamsher announced one fifth of the salary
as pension for retired soldiers in 1998 BS. In the civil service, it is found that one sixth of
the salary was provided to the civil servants who had served 25 years as pension in 1999
BS. From 2061 BS, a pension for the community school teachers was also initiated. In
1993, a Labor Code was developed requiring private sector employers to pay 50 percent
of the wages for the sick and leave of up to 15 days each year, and the employer was
required to employ at least one year continuously[ CITATION NPC12 \l 1033 ]. In 2016 BS,
Employees Provident Fund Department was established and three years after the
establishment of Employees Provident Fund Department, a special Act called
"Karmachari Sanchaya Kosh Act" was legislated in the year 2019 BS. The same year the
present Employee Provident Fund, was established under the act as an autonomous
provident fund organization. Citizen Investment Trust a statutory institute under Citizen
Investment Trust Act 2047, was established as an autonomous body and has ownership of
Nepal Government as a public financial organization. Similarly Social Security
Allowance to Elder Citizen was introduced in 2051 BS. The Concept of Retirement Fund
by Income Tax Act came in 2058 BS and The Social Security Tax and Social Security
Fund was introduced in 2066 BS[ CITATION Pau16 \l 1033 ].

In 2074 BS to diversify the area covered by the social security system the government of
Nepal promulgated two major legislations related to labor, namely the Labor Act 2074
 10

(2017) and the Contribution-based Social Security Act 2074 (2017), and then prepared
regulations required for their implementation. The Contribution-based Social Security
Act 2074 and the Contribution Based Social Security Regulations 2075 (2018), which
was framed by Government of Nepal by exercising the power conferred to it under
Section 69 of the Contribution based Social Security Act (“Social Security Act”)
provided legal foundations for application of the new social security scheme.

2.6. Importance of Contribution Based Social security

Social security provides protection and relief to the members of society against dome
contingencies that expose them to certain risk of economic and social security. In broader
sense social security also provides psychological and sociological security to an
individual. In case of contributory social security, it ensures that when the workers have
contributed their time and effort to any organization and the society, he doesn’t become a
liability to his family, his employer and to the society. These measures ensure that the
workers are provided protection and security in their life time. Similarly, the importance
of contributory social security has been widened to include the complete quality of
working and living life in each aspect. It is a wise investment which motives the
employees and boosts their morale leaving to higher quality production and it is a basic
instrument of social and economic justice among members of the society. It also leads to
adoption of the schemes of unemployment, insurance and creation of new employment
through a drive for rational planning and industrial development, establishes a scheme of
old age and unemployment pension, covers more different types of risks like sickness,
maturity and employment injuries. In addition, it also emphasizes and ensures that the
ideas of human dignity and social justice are duty taken care. Thus, contribution based
social security is a must for the protection and stability of workforce in any economy.
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CHAPTER THREE

EXISTING LEGAL PROVISION OF SOCIAL SECURITY ACT IN

NEPAL
3.1. Contribution Based Social security Act 2074 (2017)

Contribution Based Social Security Act 2017 (the Social Security Act) was given the seal
of approval by the president on August 13, 2017 and it came into force with effect from
November 11, 2017. The act is the first of its kind in Nepal. The Act is formulated
specially to deal with matters related to social security which have been enshrined in the
constitution and further prescribed under the Labor Act 2017 (2074) and Labor
Regulations 2018 (2075). The Act has been enacted to ensure the rights of the workers
based on the concept of contributory social security and to provide social security to the
contributors. As the name suggests, the newly passed Act is contribution based. This
means that only those who have contributed to the social security fund are entitled to the
benefits of the fund. The Social security act is applicable to all the industries, businesses
or other service sector as prescribed by the government of Nepal.

Chapter 2 Provision related to Contribution Based Social Security Plan

As mentioned in the Section 3 of the Act, no person shall be eligible to Social Security
under the provisions of unless contribution to social security has been made. Similarly,
Section 4 mentions that the contribution starts from the date of enlisting of the employee
to the Fund till the last day of his/her service with the employer. Such contribution to the
Fund should be made on monthly basis, unless otherwise provided. The contribution
should be deposited to the Fund within fifteen days from the date of end of the month in
which the income subject to contribution is payable.
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As specified in Section 5, in case of employees in informal sector or self-employed, such

employees can also have voluntary participation in the social security plans by depositing
the amount as prescribed by the Ministry in the recommendation of the Committee by
publishing notice in Nepal Gazette. Informal sector and self-employed employees can
select one or more than on social security scheme based on the amount of their
contribution. Listed employers form both his and employees side shall contribute the
amount as per the contribution rate published in Nepal Gazette. As per the Social Security
Operation Procedure, 2075 the contribution rate for now is 11 percent of the basic salary
of the employee from employee’s side and 20 percent of basic salary from employer’s
side. Section 8 of the act mentions about the contribution during unpaid period. Here, the
listed employer is required to deposit the contribution of the employee in a situation
where the employee is not entitled to salary and has to deposit amount to the Fund for
maximum three months. The employer than can deduct such amount from the
remuneration, allowance and other benefits payable to the employee.

The Section 9 of the Act has provided the authority to the Fund to recover the
contribution from the employer with 10 percent interest except the time for contribution
is extended by the Fund at the request of the employer in case of failure to deposit within
the specified time. The Fund can also waive the interest in full or part while extending the
time. The Act provides the Fund different measures for the recovery which includes,
freeze the bank accounts, freeze movable and immovable properties, abrogate all the
facilities received as per law, cancel the license, and freeze the passport. In case, if any
person who is not associated with Social Security program, or any person under the
scheme is facilitated with benefits in excess of his contribution and such information is
obtained by the Fund then such amount is recoverable from such person and then
deposited in the Fund.

The Section 10 of Social Security Act also specifies the Scheme that shall be operated by
the fund. The scheme include, Medical and Health Protection Scheme, Maternity
Protection Scheme, Accidental Protection Scheme, Old-age Protection Scheme,
Dependent Family Protection Scheme and Unemployment Protection Scheme. The Fund
 13

has authority to introduce other schemes if necessary. The scheme is introduced on

priority basis as declared by the government of Nepal and the fund can also run different
types of schemes as per the nature and requirement of the job of the listed employees.
The contributor shall maintain separate account for each scheme and the amount
deposited on each scheme cannot be used for other.

As per the section 17, if any employer is not enlisted within the prescribed time, or
employees of the enlisted employer are not enlisted, then the Fund can issue the
instructions to enlist with the Fund immediately, pay applicable interest from date of

agreement with such employee as specified in section 9. On failure to pay such amount
by the employer, the Fund shall recover such amount and provide to the employee.

Chapter 3 Provision related to Enlistment in Fund

As per the section 19 of the Act the government specifies the timeline within which the
employer is required to be listed in the Social Security Fund. For this a notice is issued in
Nepal Gazette that prescribes the sectors, business, industry or service that the Social
Security Act applies. The employer should submit an application to the office of the Fund
in the prescribed format with the prescribed details. Upon the receipt of the application,
the office of the Fund provides the listed number to the employer. Section 20 of Act
requires the employer to enlist the employees in the Fund. At the time of enactment of
this act employer shall list themself within 6 months from the effective date. After the
enactment, the employers should enlist the employees in the Fund within 3 months from
the date of establishing the employment relation with such employee. In case, if the
employer does not enlist the employees with the time specified above the employees can
give an application for being enlisted.

The Fund provides Social Security Number to the registered employee or self-employed
as per section 49 of the act. For People working in public service or receiving salary from
the public fund the registration is managed in a way prescribed by the government of
Nepal. Any employers having the register number and the employee with social security
number is deemed to have been listed with the fund. In case of discontinuation of the
 14

employment of any employee the enlisted employer should notify the fund within one
month of such separation. Similarly, upon liquidation, dissolution or winding up of
enlisted employer, enlistment number provided under section 19 shall become invalid.

Chapter 4 Establishment and operation of the fund

As per the Section 26, the Social Security Act provides for the establishment and
operation of the Social Security Fund. The Fund is established as revolving fund the head
office of which is located in Kathmandu and branches in any other places within Nepal.
The Fund is recognized as separate entity. The meeting of the committee shall be held at
least once in six month and held on such date, time and venue as specified by the
Chairperson. The quorum of meeting shall be deemed to be completed if at least Fifty
percent of the total the member of board are present. The Social Security Act also
provides for other functional arrangements such as, Internal Control System, Audit and
Actual Evaluation, Record and identity of the participant, etc.

Chapter 5 Identification, Records and Identity Document

Section 39 of the Act mentions that the fund will develop an information technology
system to record identification of people receiving social security under this act. As per
the Section 40, the contributors receiving the social security numbers shall be bounded to
record system mentioned by the committee and the committee can receive any
information or personal details for all the available record system. The committee will
issue a certificate containing social security number provided to all the contributors.

Chapter 6 Provision related to Executive director and employee

As per Section 42, there shall be one executive director as the head of the committee and
he shall be responsible for all the works done under him. A subcommittee consisting of
three members of the committee shall also be formed to provide recommendation for the
appointment of executive director.
 15

Chapter 7 Provision related to offence and punishment

As per the Section 47 of the Act, the following acts shall be considered offense under the
Act:
 Misappropriation of the amount to be deposited with the Fund within the specified
time,
 Obtaining the benefit submitting false or misleading information, or obtaining more
benefits than entitlement,
 Committing irregularities in any Scheme related to the Fund.

A penalty of Rs 100,000 or imprisonment for 1 year or both shall be levied if the amount
is cannot be quantified and where quantifiable the penalty shall be equal to the amount
involved in the offence. For other person who have assisted in the offence, the penalty
shall be 50 percent of the punishment accorded to the principal offender . The Act also
provides for the punishment for the person who violates any order given by the Fund.
Such person is subject to fine up to fifty thousand. Section 50 mentions that the
government will be plaintiff for the cases initiated under the Social Security Act.
Similarly, as per Section 52, if anyone has problem with the decision given by the Fund,
such person can appeal to the concerned High Court within 35 days from the date of
receiving information of such decision.

3.2. Contribution Based Social Security Regulations 2075 (2018)

The Government of Nepal has framed the Contribution Based Social Security
Regulations, 2075 (2018) (“Social Security Regulations”) by exercising the power
conferred to it under Section 69 of the Contribution based Social Security Act (“Social
Security Act”). The Social Security Regulations has been published in Nepal Gazette on
November 19, 2018 (Mangsir 03, 2075) with immediate effect. The regulations will also
make arrangements for providing social security to the contributors. The regulations has
provision for enlisting in the social security fund, the individuals drawing salary from the
government fund, the laborers in the informal sector and self-employed individuals.

Chapter 2 Participation in Social Security Plan

 16

As per Rule 3 of the Social Security Regulations people who receive remuneration from
the government fund will participate in the Social Security plan. Similarly, Rule 4
mentions that people who are working in informal sector or are self-employed can also
participate voluntarily in the Social Security plan after the certification by the committee.
The government can strike an agreement with bank and financial institutions to collect
the specified amount of contribution. As specified on the Section 8 of the Act security act
about unpaid contribution, the employer can cut a maximum of 33 percent of the
employees’ total remuneration in cases when the employee is not paid as per Rule 7 of
the SSR. The account established according to Social Security Act shall be operated by
the joint signature of the Executive director or someone appointed by the director and the
head of accounts. The companies participating in the plan are entitled to the benefits
mentioned in the Section 10 of Social Security Act 2074.

Chapter 3 Provisions Relating To Notice

As per Rule 13, for the application to be given, in accordance with Section 19 of the
Social Security Act, the employer will have to submit all the necessary details within the
specified time period mentioned in the notice at the specified office or apply online in
accordance with Schedule 1. As per Rule 15, the committee shall be notified when an
employee involved in the social security plan is no longer employed in the company by
the employer and in case of death of self-employed or employee of informal sector by the
family member.
As specified in Rule 16, the committee can choose to remove an employer from the list
of certified employers in cases of disintegration, Liquidation, the closing of the company
and if the certification of the employer or the company is terminated as per the prevailing
rule. If the employer is removed from the list as per Rule 16, the employer will have to
pay the required remaining amount of his/her employer to the committee, under the active
social security plan.
Chapter 4 Provisions relating to meeting, work, roles, and responsibilities of the
committee
The Rule 18 of the SSR mentions that the committee can use teleconference or other
electronic means for conducting meeting. The decisions taken via such meetings shall
 17

have to written down. As per Rule 19, the committee can call for meetings within seven
working days of receiving the application, if one-third of the total members of the
committee write an application to the director specifying the points to be discussed in the
meeting.
Rule 20 mentions that in addition to the roles, responsibilities, and rights specified in the
Social Security Act, the committee will be held responsible to promote the programs of
Contribution based Social Security, to evaluate the programs under Contribution based
Social Security and advise the ministry accordingly and to bridge the gap between
Federal Government and Local Level to effectively execute the programs under the
Contribution Based Social Security.

Chapter 5 Provisions related to Internal Control Process

As per the Rule 21 of this regulations, the committee shall prepare and execute a model
of internal control within six months from the time that this rule comes into effect. While
preparing the system of internal control as specified above, the committee will have to
include work process of tasks that are carried out by the company, identification of risk
areas and control measures, communication module, and follow-up evaluation. The
executive director will have to appoint a superior officer or any other officer without
conflicting interest, for a follow-up evaluation of the internal control measures and such
follow-up shall be conducted at least twice a year.

Rule 22 mentions about things to be disclosed in actuary valuation. In addition to the

things specified in Section 36(3), of the Social Security Act, the possible challenges faced
and necessary steps taken to meet such challenges, provisions relating to the
establishment of assets and responsibilities of the committee and provisions relating to
review of contribution rate shall be disclosed in actuary valuation.

As per Rule 23 of the Regulations, a person having a bachelor’s degree in actuary or in

any field from a certified University having at least two years of experience in the field of
actuary and has not been listed in the blacklist while working in the field of actuary can
be appointed as actuary. He/she shall not been proven guilt in crimes of corruption or of
 18

foreclosure. The salary and benefits of the actuary will be according to the contract
between the committee and actuary.

Chapter 6 Provisions relating to social security identification, expert and advisor,

and employees and officers

As per Rule 24, the committee shall issue social security number and identity card to
contributors as per Schedule 4 of this regulations. The committee shall incorporate any
contributor who is receiving benefits under social security into the IT system, within
three months from the application of the Contribution Based Social Security Regulations.
The benefits, salary, and terms of employment of the Executive Director will be
according to the provisions mentioned in the committee’s regulations.
Rule 27 of the Regulations mentions about the qualifications, salary, employment terms,
and benefits received by experts or advisors. The committee can employee a maximum of
three advisor in a fiscal year with tenure not exceeding a maximum of six months. Any
notice, data, or report, received by the advisor during his tenure will have to be submitted
to the committee before vacating the post. A copy of the report received by the executive
director from such experts should be submitted to the ministry. Provisions relating to
vacancy creation, employee recruitment, employee selection, salary, and terms of
employment will be carried out according to the bylaws specified in the rules of human
resource department. The passing of Social Security Fund (management and operation)
Regulation 2067 let to the establishment of the social security fund as a government
department in 2010. The main objective of the fund is to record all the contributions
received into a computer system and manage the fund collected from different sources.

As per the Rule 3 of the of the SSF Rules, the fund shall have the amount received in
accordance with the prevailing laws, amount received form the contributors for voluntary
participation in the social security program, amount received from Government of Nepal
and amount received from other organization or person or any other sources. The deposit
of amount in the fund shall be done through a separate account on Nepal Rasta Bank. As
per section 4, one percent of the taxed amount taxed to an individual or spouse shall be
 19

deposited in the fund. There shall be a board of trustees for the management and
operation of the fund.

As per Rule 6, Functions, Duties and power of the Committee shall be to suggest and
advice on matters related to social security program, to prepare the outline of programs
and implement them after the approval from the government. The fund should invest the
fund collected, formulate policies relating to social security plan and keep records of all
the contributors. Rule 9 of the mentions that the committee may constitute Sub-
committee in order to carry out special nature of work; comprising of one or more
members as per the necessity. As per Rule 16, with the prior approval of the government,
the Committee may invest on the bond issued by Nepal Rastra Bank or invest deposit on
‘A’ class bank according to the prevalent laws.

3.4. Social Security Schemes Operation Directives, 2018 (2075)

The Social Security Fund has formulated the Social Security Scheme Operational
Directives (“Directives”) subjected to Section 70(2) of the Contribution Based Social
Security act to operate Social Security Scheme as per Section 10 of the same act.
Contribution based social security scheme is funded through the contributions made by
the workers and the employers. The scheme is set to initially include medical, health and
maternity benefit; accidental and disability benefit; benefits for dependent family
members and old-age benefit. As per the arrangement of contribution mentioned in
Chapter 6 of the Directives the workers shall contribute 11 percent of their basic salary
and the employers shall top up 20 percent of the workers’ basic salary.

As per the Chapter 2, 3, 4 and 5 of the Directives, contribution to social security will be
used for the following schemes in the given percentage:
 20

Use of Contribution

3% 1%
5%

Medical and safe maternity

scheme
Accidental and disability protection
scheme
Dependent family protection
scheme
Pension Scheme

91%

Schemes their Coverage and Exclusions

 Medical Treatment, Health and Maternity Protection Scheme

The Medical Treatment, Health and Maternity Protection Scheme includes the facilities
of Medical Treatment and Health Safety and Maternity security to the contributor or the
wife of the contributor. The Contributor who have contributed in the social security Fund
for a period of three months are entitled to facilities under this scheme. However,
Contributors should contribute for twelve months within a period of eighteen months in
order to benefit from the Maternity Safety Schemes. Contributors shall get the of benefits
out of this medical consultancy services, admission and operation fee of the hospital,
examination and treatment cost, medicine expenses equivalent to medical bill, expenses
incurred for the regular pregnancy test of the Contributor or Contributor's Wife, hospital
admission, operation and treatment of child for three months and medical consultancy fee
for the medical treatment undergone at home in case the contributor is unable to reach
hospital.

Contributors are entitled to following coverage for above mentioned benefits under the
above scheme:
 21

 For those admitted at hospital, payment not exceeding Rs. 1 lakh per annum shall
made to the hospital where the contributor is admitted.
 For those undertaking treatment as prescribed by the doctor (not hospital admitted),
payment up to twenty five thousand per annum shall be made.
 In case of maternity benefit expense related to treatment of the contributor or the
contributor’s wife and expense related to nursing of the newborn can be claimed up to
the prescribed limit.
 The contributor has to bear 20 percent of the total benefit claimed and the gross
benefit shall not exceed 1 lakh in a year.
 Female contributor or wife of the male contributor who has recently given birth to a
child is entitled to benefit equal to one month’s minimum basic salary for each
newborn. Such benefit is also payable in case of abortion after 24 weeks or
miscarriage. Incase both the husband and wife have contribution in the fund, only one
individual should claim the benefit.

Accidental and Disability Protection Scheme

Employee is entitled to accidental compensation under the scheme in case of any

employment related accident. Accident and Disability Protection Scheme comprises of
(a) Accidental Benefits and (b) Disability Benefit. This scheme is applicable from the
date of contribution to the Contributor who requires treatment for the employment related
accident. In case of occupational diseases and other benefit relating to its treatment,
benefit is only applicable after two years of contribution into the fund.

Benefits under the above scheme are as follows:

 Total expenses incurred for the treatment of employment related accident or

occupational diseases.
 Treatment expenses up to NPR seven lakh in case of accident except the
employment related accident.
 Amount equivalent to 60 percent of the employee’s basic remuneration until
returning to work in case of temporary disability due to occupational hazard or
diseases.
 22

 Lifetime monthly pension based on the ratio of disability of the Contributor in case
of permanent disability due to occupational hazard or diseases.
 Lifetime monthly payment equivalent to 60% of the employee’s basic remuneration
in case of permanent full disability due to occupational hazard or diseases.

Dependent Family Protection Scheme

This benefit is eligible on the death of the contributor. The dependent family shall receive
the following facility under the scheme:

Pension benefit to the husband or wife: The Pension benefit is provided to husband or
wife of the Contributor in the event of death of Contributor (in case of accident or
occupational diseases). The husband or wife is entitled to lifetime pension benefit
equivalent to 60% of basic salary of the Contributor at the time of his death.

Educational allowance to be received by children: In case of death of the contributor, the

child of the contributor who have not reached the age of 18 shall get 40 percent if the
final basic salary of the contributor on monthly basis until such child reach the age of 18.
And in case of more than one child 60 percent of final basic salary shall be provided.

Benefit to the contributor’s parents: If the deceased is the only child with no wife or
children, the dependent parents shall be provided 60 percent of final basic salary until
death on a monthly basis. If both the parents are living such facility shall be provided to
both proportionately.

Entitlement of Funeral cost: In case of death of Contributor for any reason whatsoever the
dependent family member or the nominee will be entitled to funeral expenses of NPR
twenty-five thousand.

Old Age Security Scheme

As per the Chapter 5 of the Social Security Scheme Operating Procedure 2075, the old
age security scheme is operated with the 10 percent provident fund and 8.33 percent
gratuity contributed by the employer and 10 percent provident fund contribution from the
employee. To be eligible for this scheme, the contributor shall be paid the gratuity
amount receivable before Bhadra 19, 2074 as per Labor Act 2074 and shall deposit the
 23

gratuity amount into the fund from such date. The contributing employees shall receive
pension and retirement facility scheme under old age security scheme.

Pension scheme: The Contributor should have completed the age of 60 and should have
contributed for at least 180 months or 15 years. The following contributors are eligible
for the pension scheme:
 Employee from Shrawan 1, 2076
 In case of employees availing provident fund and gratuity as per the prevailing law, if
the employee opts for the scheme or make a joint arrangement in the enterprise to be
involved in the scheme.
 Benefits under pension scheme:
Upon completion of the retirement age, the total sum amount of contribution made by the
employer and the employee as well as the amount of accrued from the investment made
by the Fund will be divided by 180 months and such amount will be provided as pension
every month to the employee. Upon death of the Contributor before the age of
compulsory retirement, their heir shall receive the total lump sum amount of the
contribution plus the accrued benefit received from the Fund.

Retirement facility scheme: The contributor on employment before the implementation of

the pension scheme (i.e. 2076 Shrawan 1) shall be paid the lump sum amount of
provident fund, gratuity, employer’s contribution and the return from the investment
made from the fund.
 24

CHAPTER FOUR

INTERNATIONAL SCENARIO OF SOCIAL SECURITY

The importance of social security in today’s world is growing. In many emerging nations
social security systems are still undergoing construction, while in other such as former
socialist states these systems are completely restructured in the so-called transformation
process. Most of the countries today have some type of social security system.
International developments resulting from globalization and human mobility have caused
nations worldwide to move closer, thus also bringing internationalization of social
security in their wake. Moreover the development of social security has also been
supported by various international conventions and organizations, and the recognition of
social security as a basic human right was also enshrined in the 1948 Universal
Declaration of Human Rights. In most of the countries like Nepal, Germany and Brazil,
social security is also a right guaranteed by the constitution. Worldwide, the most
common type of program is for old-age, disability, and survivors’ pensions, followed by
programs for benefits for work injuries and occupational diseases, sickness and
maternity, family allowance and unemployment. Some international scenario regarding
social security program and acts governing them are explained in details below.
 25

4.1. Social Security in USA

The regulatory framework for social security in United States is Social Security Act of
1935. Old-Age, Survivors, and Disability (OASDI) program which for most of the
Americans means Social Security is the largest income-maintenance program in the
united States. Based on social insurance principle, the program provides monthly benefits
which is designed to cover in part, the loss of income due to retirement, disability or
death. About ninety six percent of the jobs in the United States are covered that means
nearly all types of the work performed within the US by the citizens and noncitizens is
covered. The revenues are deposited in two trust funds (the Federal Old-Age and
Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund), which
pay benefits and the operating expenses of the program[ CITATION Soc97 \l 1033 ].

To qualify for Social Security a person must be insured for benefits. Most types of
benefits require fully insured status, which is obtained by acquiring a certain number of
credits from earnings in covered employment. The number of credits needed depends on
the worker’s age and type of benefit. This earnings figure is updated annually, based on
increases in average wages. The amount of an individual’s monthly payment is based on
their salary during their working years . The beneficiary under Retirement program are
retired workers, wives and husbands and children. For Survivor program the beneficiary
are nondisabled widows and widowers, disabled widows and widowers, widowed
mothers and fathers, children and parents. In case of Disability program, disabled
workers, wives and husbands and children are the beneficiary.

4.2. Social Security in China

The social security in China consists of five mandatory insurance schemes which are
pension fund, medical insurance, industrial injury insurance, unemployment insurance
and a maternity insurance. A housing fund is also available but is limited to Chinese
employees only. The contribution to China’s social security is compulsory for all the
Chinese employees and their employers as well as foreigners employed in China. China’s
social security law was promulgated by the central government, but its administration and
specific details are governed by local authorities. For instance, for each benefit, the
 26

employee and employer contributions rates and base differs as per the local jurisdiction
and are subject to annual changes and reforms. Chinese social security contribution is
mandatory for local Chinese employees and their employers. Under the new social
security law effective from 1 July 2011, foreigners employed in China are required to
make Chinese social security contributions as well. In practice, this requirement is
applicable to foreigners holding a Chinese employment permit.

4.3. Social Security in India

In India there are two major laws governing the contribution based social security, the
Employees’ State Insurance Act 1948 and The Employees' Provident Funds and
Miscellaneous Provisions Act 1952. The Employees’ State Insurance Act, 1948 (ESI),
enables the financial backing and support to the working class in times of sickness,
maternity and employment injury. It is a self-financed initiative, to prevent the working
class from any financial problems arising out of the above medical issues. There are six
types of benefits that can be availed that are medical benefit, sickness benefit, maternity
benefit, dependents’ benefits, disablement benefits, other benefits. All employees,
including casual, temporary or contract employees drawing wages less than INR 15,000
per month, are covered under the ESI Act. The contribution payable to the Corporation in
respect of an employee shall comprise of employer's contribution and employee's
contribution at a specified rate. The rates are revised from time to time.

Similarly, Employment Provided Fund, the main scheme under the Employees' Provident
Funds and Miscellaneous Provisions Act 1952, is a retirement benefit plan which is
based on the contribution made by both the employer and the employee and such
contribution is equal on both side. It mostly covers the company having more than 20
employees except some exceptions. Employees drawing less than INR 15,000 per month
have to mandatorily take part in the fund. The contribution paid by the employer is 12
percent of the basic salary plus dearness allowance and retaining allowance and the
employee also makes an equal contribution. Such contributions in the fund are used to
take care of one’s post-retirement needs but one does not have to wait till retirement to
withdraw money from the fund. Out of employer’s contribution, 8.33 percent will be
 27

diverted to Employees’ Pension Scheme and the balance will be retained in the fund. On
retirement, the employee will get his full share plus the balance of Employer’s share
retained to his credit in fund account.

4.4. Social Security in Pakistan

The current Social Security Schemes provided by the government of Pakistan can be
divided into two main categories. The first category consists of the “general” or “by
default” schemes. These schemes are the government schemes that requires contribution
from employers and applicable to formal sector only. There are two acts governing such
scheme, Employees’ Old-Age Benefits Act 1976 and Provincial Employees Social
Security Ordinance 1965. The Employees Old Age Benefits Institution (EOBI) is a
federal body that provides age, disability and survivors’ pensions for persons employed
in industrial, commercial and other organization employing at least ten people, and
operates under the guidance of Employees’ Old-Age Benefits Act. Half of the finances
for the scheme comes from the employer and other half comes from the government by
matching the employer’s contribution.

The Employees Social Security Institutions (ESSI) are provincial bodies operating under
the Provincial Social Security Ordinance 1965. This ESSI scheme was introduced in
March 1967 and reorganized on a provincial basis in Sindh, Punjab and NWFP in July
1970. These institutions receives all the contributions paid and other money received
under the ordinance and provides health services and some cash benefits such as sickness
benefit, injury benefit, maternity benefit, disablement gratuity, survivors’ pension and
death grant. Under this scheme the employers are held responsible for the whole
contribution. The second category consists of schemes that are specific to particular
sectors or enterprises and are specifically exempted from membership of the general
schemes. The main category exempted consists of government workers, members of the
armed forces, and some others.
 28

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1. Conclusion

Social security, including both contributory and non-contributory schemes and programs
constitute an important element as they contributes to preventing and reducing inequality
and poverty. And contributory based social security also known as social insurance is the
largest element and the foundation for the social welfare system of most countries.
Contributory social security provides a method for addressing the problem of economic
security in the context of modern industrial societies where individuals contribute to a
central fund managed by governments, and this fund is then used to provide income to
individuals when they become unable to support themselves through their own labors.

Introduction of Contribution Based Social Security Act 2074 and Contribution Based
Social security Schemes reflects the positive approach of the government of Nepal to
provide social protection coverage to the population which was previously mostly limited
to public sector only. Participation in programs of social protection while enhancing the
coverage and providing secured rights for the workers gives them dignity and a sense of
solidarity. Realizing the importance of the contributory social security, the government
has launched acts, regulations and schemes related to social security, aimed to serve
nearly 3.5 million people in a national campaign to ensure the social security of private-
 29

sector workers with a comprehensive welfare package and also has introduced provisions
for self-employed and employees in informal sector the coverage of which is unknown.

In case of Nepal we can see that there is no clear understanding of what government is
trying to do. It is still unclear as what will government do to the Employee Provident
Fund and Citizen Investment Trust after requesting all employees to participate in Social
Security Fund. The launch of the contribution based social security scheme was initially
praised by both labor rights organizations and the private sector. However, their
excitement about the scheme seems to have faded lately which is evident in the poor
registration to the fund. This poor registration is basically because employers have not
shown much interest in joining the scheme as it adds to their cost and another reason is
that the stakeholders has no proper information the scheme, its operation and benefits
under it.

Workers doesn’t seem to be confident over the scheme and many fear that the money
contributed will be stuck for the long time and will not be able to withdraw in the times
of need. So government needs to encourage such workers by providing a clear
transparency of how the fund is going to be utilized for their welfare and show that social
security is an essential that protects them from future uncertainties. Similarly, there is no
clear information about how the government is going to participate non formal sector in
the social security and no provision has been made for Nepali citizens working abroad or
foreign citizens working in Nepal.

5.2. Recommendation

A strong demand for social security and better protection for all workers is gaining
importance in Nepal in recent days but the main problem lies in the effective planning
and implementation of such social security programs. More than seventy percent of the
active population of Nepal is involved in the informal economy, and to provide all
citizens access to an adequate and affordable level of health services and enjoy a decent
pension or at least a minimum income in old age, the government should introduce
various social security plans targeting this population. In addition to low incomes, many
self-employed workers or workers in unclear employment relationships or workers in
 30

informal economy have variable incomes, which requires specific adaptations to

contributory social security schemes designed around employees with stable wages. The
following are the recommendations that government can take into consideration to make
social security more accessible and attractive:

 Relax minimum thresholds on income for contribution purposes for coverage of

casual and temporary workers as well as using differentiated contribution rates for
self-employed workers and informal sector worker.

 Modify the contribution collection schedule to fit in with the income patterns of self-
employed workers, such as annual rather than monthly income (as in Sweden),
seasonal income for rural producers (as in Brazil), or allowing lump sum or quarterly
contributions (as in China).

 Allow for deferral of contributions during economic crises or interruptions in

contribution periods due to pandemics (COVID-19 Crisis).

 Provide government subsidies for contributions of self-employed persons having very

limited contributory capabilities.

 Review the contribution rate every three years through actuary analysis to avoid
accumulation of unnecessary resources and to ensure that the fund does not run dry.
 31

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