BackIndia’s demography is ripe for pension planning
A broad picture of need and reality of pensions in India. Excerpts from the report 'Financial Security for India's Elderly, the Imperatives, April 2017', by Crisil and PFRDA
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India’s rich demographic dividend makes it a young country. Most of the population is under the age of 25 years, and is expected to remain so for the next couple of decades, says Financial Security for India’s Elderly, the Imperatives, April 2017, a report by Crisil and Pension Fund Regulatory and Development Authority (PFRDA). Almost 90% of the population was below the age of 60 years and the working age population proportion stood at 44% in 2015, it adds. But the population is also ageing with each passing day. The share of the elderly in India’s population rose to 8.6% in 2011 from 5.6% in 1961. According to its population projections for 2001-26, this would increase further to 12.4% by 2026 and every fifth Indian will be a sexagenarian in 2050 compared with one in 12 now. Thus, by 2050, India would be in a similar position to today’s developed world in terms of the share of the elderly in the population.
The situation that developed world faces today on social security for the elderly, is because of two main factors: increase in life expectancy and decline in the total fertility rate (TFR). As per World Health Organization (WHO), India’s life expectancy has also been on the rise, from 62.5 years in 2000 to 68.3 in 2015. Also, a 60-year-old was expected to live another 17.9 years in 2015, vis-à-vis 16.5 years in 2000. Significantly, female life expectancy is higher than of males, both at birth and at age 60. For 2015, life expectancy at birth and at age 60 stood at 69.9 and 18.6 years respectively, for females, compared with 66.9 and 17.2 for males. From a pension perspective, an increase in life expectancy at age 60 impacts the fiscal spending that the government might need to entail. Since females have been mostly dependent on their male counterparts, a longer life expectancy for females implies increased social support from the exchequer.
The country’s total fertility rates too has decreased drastically over the years. According to the WHO, total fertility rates refers to the number of children born or likely to be born to a woman in her life time, if she were subject to the prevailing rate of age-specific fertility in the population.
The combined effect of life expectancy and total fertility rates can be seen through the old age dependency ratio, or the total number of elderly aged 60 years and above to the total population aged 15-59 years (multiplied by 1,000). For India, the old age dependency ratio as per 2011 census data stood at 142, or a ratio of one elder person for 7 people of working age. As per technical projections, the old age dependency ratio will rise to 192 by 2026. This implies that for each elder person, we would have only 5 people of working age.
Given that both fertility and life expectancy are factors that determine future population demographics, the analysis implies that there needs to be a differential approach in which the pension industry should focus on the country as a whole in terms of achieving pension coverage and adequacy for the future elderly populations.
Recommendations for cluster 1: Cluster 1 comprises states of India that have higher elderly population and higher per capita income. A large population is expected to age in the coming years for this cluster, thus it is very important to develop focused pension strategy for the working-age population. Most of the states in this cluster have high per capita income, implying that their standards of living would be higher compared to states in Cluster 2. This segment would require products that can provide higher returns on investment, to maintain similar living standards post-retirement. Given that this cluster comprises states where investors can afford to contribute for pension, the strategy should be focused on promoting market-linked pension products for working-age population.
Recommendations for cluster 2: This cluster comprises states with lower elderly population and lower per capita income. The elderly population here is still not increasing at an alarmingly high rate. However, this segment consists of large states like Uttar Pradesh, which alone accounts for 15% of all of India’s elderly population. Due to low per capita income, there is a problem of affordability as well as adequacy of retirement savings among the masses. The focus for the pension industry here should be to provide today’s working-age population with pension products that can take care of their basic needs. The focus here should be to increase awareness among the working-age population about pension schemes offered by the government for lower-income groups such as Atal Pension Yojana. Given that affordability is a big concern in these states, the government might look at targeted pension schemes for elderly poor or co-contribution model under Atal Pension Yojana, so as to incentivise the population in the lower-income strata.
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