India’s old pension scheme was simply not sustainable
SummaryReframe the debate on the old versus new scheme as one of defined benefit versus contribution
India prides itself on its young demography. The median age of the population is 27 years. The subset of working-age people out of the total population is growing 1% faster than the total set. On a base of 1.4 billion people, that translates to a bigger bulge every year. This is the basis for our growth optimism, and the potential virtuous cycle of a young workforce that is working, earning, consuming, investing and paying taxes. The other implication is that the dependency ratio of working age-to-retired persons is favourable for India. The word ‘favourable’ is meant in a fiscal sense. If working people pay taxes, which support social security for retired folk, then the low per-capita taxpayer burden depends on the favourable dependency ratio. This is actually relevant to most OECD economies, where every person upon reaching the age of 65 is eligible for old-age benefits. That is an entitlement guarantee from their respective social contracts. Such universal coverage for the elderly is a distant dream for India. For OECD economies, the dependency ratio is a significant matter because social security is essentially a pay-as-you go system. The working young pay for the retired old. In India, only about 11% of the elderly draw a pension as former workers of the government (be it at the Centre or state level). The rest have a pension scheme that is minuscule by comparison. The pension paid to the elderly was on a pay-as-you go principle in India too, being paid by current revenues of governments.