Can we afford pension exclusion?

Income insecurity in old age is rapidly emerging as one of the most important causes of poverty in India and for South Asia more generally. Most of India’s 144 million informal sector workers who earn Rs 3,000 or less per month will become destitute as soon as they stop working. Or will be forced to work till they die.

To avoid either of these outcomes, they will need to accumulate enough savings during their years in the workforce to support themselves with dignity for nearly 20 years after they are too old to work. But their fragile labour market attachments and modest intermittent incomes, coupled with the absence of a low-cost, secure and easily accessible long-term savings mechanism has effectively put retirement planning out of the reach of India’s working poor.

Women workers are even more vulnerable to old age poverty. They enjoy a higher life expectancy than men and will, therefore, need to accumulate a much larger retirement corpus. This would be difficult for the majority as most women are unpaid family workers. The remaining earn relatively lower incomes than men in comparable occupations and face a shorter working tenure that is often interrupted due to child-birth and other family responsibilities. Hence, women face an even higher probability than men of outliving their savings.

Data on the savings behaviour and retirement outlook of the poor from the Invest India Incomes and Savings Survey 2007 reveals that less than 5% of India’s working poor are actively saving for their old age. Even for this group, however, the savings accumulations are very modest and the average savings corpus of those aged above 45 years is Rs 25,000 or less. Hence, the best case scenario, even for those currently saving for their old age, is that they will manage enough pre-retirement savings to support themselves for no more than two years when they decide to stop working or are unable to work. This presents a bleak outlook for the next generation of India’s elderly and clearly suggests that old age poverty will continue to be an intractable public policy challenge.

For a majority of the working poor therefore, and equally for the government of India and its states, a vital issue should be the management of longevity risk with the cessation of earnings in old age. But even 10 years after the OASIS Report and six years after the New Pension System (NPS) was born, we are yet to observe any serious political will on bridging India’s huge pension coverage gap. Instead, we’re caught between political inertia on the PFRDA legislation and disarray on both mandatory and voluntary NPS implementation.

India would not need urgent policy intervention on pension reforms if the excluded workers were using financial markets to prepare for their old age. In reality, however, less than one in three of India’s working poor have financial savings of any kind. Nearly a third of this population believes they will need to work well into their old age as they would be unable to accumulate enough savings to otherwise support themselves. The majority (nearly 60%) have given no thought to their retirement income needs, including more than half of those over 40-year-olds for whom old age income security should be a front-of-mind issue.

Importantly, more than 90% of the working poor who expect to be unable to work beyond a certain age are making no active preparations to support themselves in their old age. Part of the explanation is that over a third of these workers expect their children to support them when they are no longer able to work. However, given the probability of their children also being in the low income workforce, this strategy appears tenuous at best.

The National Old Age Pension Scheme (NOAPS) has been the primary policy intervention for India’s destitute elderly. But as the population of the elderly is estimated to grow from the present 90 million to 200 million in the next two decades, the fiscal cost of a meaningful tax-funded old age pension could soon be in the region of Rs 80,000 crore per annum. While this is barely half of what we already spend on civil service pensions, the combined pension bill may be unsustainable for future governments and future generations alike—especially since the tax-paying population is unlikely to outpace the elderly.

Future governments may however be unable to entirely escape the fiscal burden of the elderly, as nearly half of India’s working poor expect some financial support from the government in their old age. The continued growth in nuclear households and the growing incapacity of low income, joint and extended households to support non-earning elderly will further intensify this pressure.

The current tenure and focus of the UPA is easily our best bet at significant progress on India’s old age crisis. As a first step perhaps, it should look carefully at the cost of policy inaction through the rapidly shrinking window of India’s demographic advantage.

—The author is director of Invest India Economic Foundation, gautam@iief.com