Sustainable pension inclusion in India

Abstract

There are 128 million elderly in India, and this number is expected to nearly double by 2030 and triple by 2050.1 Less than 30 percent of these elderly receive some form of formal pension benefits, and over half of the elderly live in poor socio economic conditions. The current spend on pensions is 3 percent of GDP, and 2.6 percent is the cost of providing pension to government servants only (Singh, 2013). Since providing full pension coverage to all elderly would be fiscally unsustainable, the government launched a defined contributory pension system in 2004 and opened it out to the private sector including the informal sector in 2009-10. Despite the tax incentives, the uptake of DC schemes has not been encouraging, with only 6 million subscribers for the scheme.2 The government also has a range of targeted welfare schemes for the BPL cardholders, however the targeting is so poor that less than 20 percent of the eligible beneficiaries receive the benefits (UNFPA Survey, 2011). This also leaves the APL individuals who are just above BPL but not stable enough to save sufficiently for retirement, completely unprotected. Life expectancy of Indians is on the rise, and with the traditional joint family system disintegrating, the elderly have little to fall back on and are subject to old age poverty and destitution for as long as 20 years after 60. If the current scenario continues to prevail, a significant proportion of the population will continue to live such undignified lives in their old age. Pension inclusion has benefits for economic growth, social inclusion and political gains. Pension transfers are known to be invested in productive purposes such as education and healthcare, leading to a more productive workforce (Willmore, 2006). It also has the potential of positively influencing the savings rates of the country, and is an efficient form of government expenditure, with a multiplier potentially greater than 2.36.3 It contributes significantly to poverty reduction, and potentially reduces crime to the extent that crime is correlated with poverty. By providing social pensions, the government can also build goodwill, which can lead to increased trust in the government. The policy options for pension inclusion are evaluated on two primary criteria Effectiveness, i.e. number of elderly covered by the policy, and Efficiency, i.e. cost of providing the pension amount. Recognizing the high cost of a defined benefit scheme and low coverage of a defined contributory scheme, the paper proposes a Beveredgian system of pension inclusion, where the State and the individuals co-operate for effective pension inclusion. The State provides a minimum non means tested, i.e. universal, pension to all elderly, and enables a mechanism which allows them to top up their savings. The cost of providing universal pensions is estimated at 0.5 percent of GDP, assuming a modest monthly pension of Rs. 500, which is inflation indexed.4 This cost increases to 0.8 percent of the GDP in 2030 and 1.4 percent in 2050. 9 countries (most of them developing nations, except New Zealand) and 1 city provide universal pensions to their elderly, and have attempted different measures to keep the costs in check (Willmore. 2006). For India, I propose a Phased rollout of the system Phase 1 for the first 5-10 years to focus on universal pensions for women, and later expand coverage to all elderly. Pensions to women have additional economic benefits, to the extent that cash transfers to women are known to lead to greater investment in education of children, particularly girls. The Indian GDP can expand by 27 percent if the gender gap in labor force participation is closed (IMF, 2016). Besides these obvious economic benefits, this policy also has the potential to attack the gender inequality problem at its root by breaking the association of male child with inflow of money and of female child with outflow. The share of elderly population is 10 percent today and is expected to rise to 20 percent of the population.5 Given their significant size, it is imperative for the government to take immediate and effective action to ensure financially secure and dignified lives for the elderly.