The world has a $400 trillion problem
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Union finance minister Arun Jaitley, in his 2015 budget speech, acknowledged that most people in India do not have any kind of insurance and, as the population ages, it will also be pensionless. He announced steps for creating a social security system. This included insurance and pension schemes, mostly for the underprivileged segments of society. But India is not the only country that is facing social security problems.
The advancement of healthcare facilities in most parts of the world has resulted in a significant increase in life expectancy. But increasing life expectancy does not necessarily mean that quality of life is also guaranteed to improve in the future. Since people will spend more time in retirement, the level of consumption in those years will depend on savings accumulated during the working age and the kind of security provided by the state. As things stand today, with rapidly ageing populations and the state of government finances in most countries, the future looks challenging.
According to a recent report by the World Economic Forum, the retirement savings gap in eight countries—Australia, Canada, China, India, Japan, the Netherlands, UK and US—will reach about $400 trillion by 2050. The savings gap in 2015 was about $70 trillion. It is important to note that the annual savings gap is estimated to grow by 10% in India, compared with 7% in China and 5% in the US. As a result, the savings gap in India is estimated to escalate to $85 trillion by 2050. Globally, things have also got complicated because of lower returns on investment over the last decade.
The problem can worsen significantly if people live longer than is expected at present. The International Monetary Fund, in its “Global Financial Stability Report” (April 2012), for instance, noted: “…if everyone lives three years longer than now expected…the present discounted value of the additional living expenses of everyone during those additional years of life amounts to between 25 and 50 percent of 2010 GDP (gross domestic product). On a global scale, that increase amounts to tens of trillions of US dollars, boosting the already recognized costs of aging substantially.” The retirement savings gap will not only affect the quality of life of retirees, but can also pose macroeconomic challenges. As the proportion of retirees rises in the population, a shortfall in retirement income will affect consumption and growth. It will also affect fiscal sustainability as governments will have to spend more on retirees even in countries that do not have a state-funded retirement system.
In order to improve financial security, the report suggests that policymakers should focus on three key areas—providing a safety- net pension for all, improving access to retirement plans, and encouraging initiatives to increase the rate of contribution. The study further notes: “It should be the responsibility of the government to provide a pension income for all citizens that acts as a ‘safety net’ and prevents those who miss out on other forms of pension provision from dropping below the poverty line.” This is a worthy goal, but fiscal constraints may prevent many governments—especially in developing countries—from doing so.
The pension challenge in India will be fairly acute. According to the UN Population Division, the share of population aged 60 or above will rise to 19% by 2050, compared with 8% in 2010. The government recognizes the problem and has implemented several reforms in the sector. For instance, it established a pension regulator in 2003 and moved new government employees (except in the armed forces) to a defined contribution-based National Pension System (NPS) from 2004. The NPS was opened to all citizens on a voluntary basis in 2009 and the government offers tax benefits to contributors.
However, all this may not be enough. The biggest problem for India is that about 90% of the workforce is in the unorganized sector and lacks proper access to retirement-saving instruments. Even those who are investing may not be aware how much money they will need after retirement and what it takes to attain that goal—though this is not an India-specific problem. People generally lack the ability to make complex calculations and give more importance to their near-term needs than a longer-term requirement like retirement saving. Therefore, it is important that both the government and the makers of retirement products place adequate emphasis on spreading awareness. Further, it will also be important that products are simple and easily available. Technology can play a big role in making products available to savers. In India, generating more employment in the formal sector will help address the problem to some extent.
As the governments in most countries lack fiscal space, they will need to work on increasing retirement savings in order to avoid the looming pension crisis. Mobilizing savings for retirement could be a big opportunity as it would provide long-term savings which could be used to fund economic growth.
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