/etc/passwd is sometimes called the user database. That should give us a clue as to why it needs to be readable by everyone. Any utility that inspects file metadata needs to be able to read
/etc/group) in order to be able to resolve the numerical IDs used by the kernel and its subsystems to the human-friendly names that we rely on. Tools that need to find your home directory (mail delivery agents, etc) look that information up in
inet miniservers like
fingerd look up your details in
As has been pointed out elsewhere, there is no particularly sensitive data in the file, as modern systems put the password hashes in a shadow password file, which is readable only by root.