Completely inadequate: India's pension systemIndia’s pension system is inadequate and expensive. But, there is time for changes to be made for the good of the country’s long-term financial security.
What sounds like bargain prices to Westerners must be measured against the reality of life. In India, despite GDP growth averaging 6.5% a year since 1991, 42% of the population still live on less than $1.25 a day, and the social safety net is sparsely and often inefficiently meshed.
For the elderly, the Indira Gandhi National Old-Age Pension Scheme (NOAPS) provides a measure of relief. People aged 65 years or more and belonging to households living below the poverty line are entitled to 300 Rs ($5.50) a month, as well as two or four kilograms of rice depending on their nutritional intake. Twice a year, for the Deepavali and Pongal festivals, men receive one free dhoti and women a free saree.
“The way the poverty line is defined, however, prevents many other needy people from accessing pension benefits,” says Arnav Pandya, a researcher and consultant on pensions in India. “In fact, even the 17 million beneficiaries have major problems receiving their monthly payments. What tends to happen is that payments get ‘bunched,’ so several months arrive together.”
In a letter to Prime Minister Manmohan Singh in May 2012, the rural development minister, Jairam Ramesh, requested the NOAPS be reviewed. “I have always held the view that the amount of pension we are giving is an insult to the dignity of the individual,” the minister wrote.
Apart from urging a review of the pension, Ramesh wanted payments restructured so pensioners would receive benefits in their bank accounts on an assured date every month. Last October, the government raised the rate to 300 Rs, with the 35 state and union territory governments expected to provide a similar amount.
“The total is still inadequate, but it is better than nothing,” says Hira Sadhak, an advisor to PricewaterhouseCoopers and former chief executive officer of LIC Pension Fund. In fact, he adds, NOAPS manages to be both inadequate for recipients and incredibly expensive for the nation.
This is reflected in the Allianz Pension Sustainability Index of countries with the most sustainable pension systems. India is next to last among the 44 countries studied. One reason for the rating is that, while both pension coverage and the replacement rate (the percentage of a worker’s preretirement income received as a pension) are extremely low, the fiscal burden of the pension system is as high as in many western European countries. This is a significant factor in the high overall debt level of India, which is 70% of GDP.
According to the Ministry of Statistics, the elderly (aged 60 years or above) accounted for only 7.4% of the population in 2001. While India is ‘young’ with a median age of 25 (UN 2010 World Population Prospects: in comparison, the US median age is 36.9 and Italy 43.2), and with one-sixth of humanity living in the country, the elderly number over 80 million people, a figure that exceeds the entire population of all but 16 countries.
The proportion of the elderly is set to rise to 12.4% of the population by 2026 against a background of rapid transformation in household structures. Traditionally, India’s elderly are supported by an extended family. However, the economic transformation undergone since the end, in 1991, of the license raj – the Byzantine regulation and permit system that formed the basis of India’s planned economy – is having profound social consequences.
The extended household is changing to a nuclear one, and the elderly can no longer depend on transfers from their children. Other changes, such as the migration from the country to the city, are also leaving many older people in rural areas without any familial support. Left to fend for themselves, many elderly are in poor physical condition and unable to collect water from wells or hand pumps, let alone earn a living.
This situation has pushed the government into assuming an ever greater role in assisting the destitute elderly, and there are calls for a universal, non-means-related, noncontributory pension scheme as a right, such as at a 48-hour 'dharna' by 5,000 elderly people last May. A dharna is a fast held outside an offender’s door in order to shame them into complying with a demand for justice, such as paying their bills.
Yet, with a public debt of over 70% of GDP, and NOAPS supporting less than a tenth of India’s current elderly, others question the cost of continuing and extending the current system. N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, has written that a move to extend the system would entail a huge fiscal burden that would see public debt levels soar and may produce macro-economic instability.
Unfortunately, neither occupational nor private pension savings provide a solid base on which to build for retirement. Today, the modern Indian pension system is a rickety three-pillar structure that is both complex and totally inadequate for the needs of most of the population.
While it consists of targeted plans for high-wage earners, civil servants, the formal sector, and Indians living and working abroad, less than 12-20% of India’s 493 million active members of the workforce are actually covered. Introduced in January 2004, the New Pension System is a defined contribution plan for civil servants who entered government employment after that date.
In 2009, the New Pension System was extended in an ambitious bid to draw in India’s massive informal sector working above the poverty line – one of the largest in the world – into the retirement system. Yet, the positive impact of this won’t be felt for another 30-35 years.
With 42% of children malnourished or underweight, low literacy rates, and increasing inequality – amongst a host of problems besetting this still-developing nation – pensions may not seem to be India’s most pressing concern. Yet, Hira Sadhak says it’s a system that needs to be organized now for the economic security of the country in the long term.
“Financial literacy in India is the lowest in the Asia-Pacific region, yet there are indications that awareness of the need for old-age income is changing,” he says. “According to a 2007 study, nearly 69% of households in India save for old-age financial security.” The government needs to promote and further encourage their efforts, he says.
The NPS is an offshoot of this growing awareness, but it is only slowly gaining traction. Savings are also encouraged through tax incentives on long-term investments, such as pension and life insurance. There is also pent-up demand for increased participation by the private sector – through mutual funds, for example. Sadhak believes these could enter the market in a substantial way in the near future.
According to the United Nations, India’s total fertility rate has more than halved in 60 years, estimated at 2.54 births per woman in 2010. This figure is set to decline further to 1.87 by 2050, while the number of elderly will begin to rise. Unlike many other Asian countries, India has time to adjust to an aging population, but it is not an issue that can be deferred indefinitely.
Caught in a daily struggle to survive, India’s unorganized workers can hardly afford to save for retirement, and the subcontinent is faced with implementing a sustainable pension system. For more details, download the working paper 'What’s happening in India?' at PROJECT M research