Present young population needs a future retirement net
3 min read 07 Jan 2015, 07:13 PM ISTThe worry is that most people will be financially insecure in their sunset years
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A Crisil Research report shows that currently there are nearly 100 million people in India aged over 60, and this number will triple to 300 million by 2050. The report, When India Ages, Whither Pension for All?, says the worry is that most of them will be financially insecure in their sunset years if a social security net doesn’t get built immediately.
When a young India ages
In the next 35 years, the number of people aged 60 or more will multiply 2.6 times, while that of those in the working age bracket of 15-59 will rise by less than half of that. This means there will be only 3.3 workers per old person in 2030, from 4.2 today.
And if a large number of the old don’t have pension by 2030, the government will have to bear the heavy fiscal burden of providing minimum sustenance to them (as much as 3.4-4.1% of the gross domestic product, or GDP, by 2030). For comparison, central government today spends 3.0-3.4% of GDP on education and over 1% of GDP on medical and public health, water supply and sanitation. A multifold increase in pension coverage to the private sector workforce is an imperative.
A targeted pension scheme
If the private pension coverage expands sufficiently, the government can provide income support for only the poorest 30% of the old population. In addition, the income support could be significantly higher at 2,000 per month in today’s prices compared with what is provided now under Indira Gandhi National Old Age Pension Scheme. This is also double the targeted minimum pension for employees under the Employees’ Provident Fund Organisation.
A universal pension scheme
The government may have to launch the universal pension scheme if the coverage of the retirement funds industry stays low at its current level of 8% even by 2030. Under the scheme, every citizen aged 60 and above will get a pension of 1,000 (at today’s rupee value) per month, per person, lower than under the targeted pension scheme. That’s because under the universal scheme, the entire old population is to be given a pension.
In this scenario, despite the lower per person pension, per year fiscal burden on the government is higher at 4.1% of GDP by 2030, which declines to 3.9% of GDP by 2050 (including pension payments to government retirees) because the entire population aged 60 and above is covered. The higher fiscal burden will largely have to be funded by higher taxes if fiscal deficit needs to be controlled. The higher cost of a Universal Pension Scheme as well as providing income support to all old people irrespective of income status will make its implementation challenging.
Scope for private retirement funds market
Within the private sector, only about 8% of retirees receive pension today. The need of the hour is for the retirement funds industry to considerably expand its coverage. If 70% of private sector retirees are adequately covered by 2030, their retirement assets will rise to 26% of GDP in 2030 from 7% today (pure pension corpus is about 2% of GDP). If the entire private sector workforce that will be over 60 in 2030 has adequate retirement cover, then retirement corpus size will rise to nearly 276 trillion (38% of GDP) by 2030 and 3,626 trillion (74% of GDP) by 2050 compared with 7.21 trillion as of latest available data.
How the government can avoid a fiscal hump
The government will have to play a critical role in facilitating increased pension cover. Retirement industry coverage will have to be increased significantly by 2030. Incentivizing savings for retirement must be an urgent goal for the government, lest the potential fiscal cost will rise.
Edited excerpts from a Crisil Research report, When India Ages, Whither Pension for All?
