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India’s much-vaunted demographic dividend makes it a young country, with the bulk of the population under the age of 25 years, and expected to remain so for the next couple of decades. As per United Nations (UN) population estimates, almost 90% of the population was below the age of 60 years, and the proportion of working age population stood at 44% as of 2015.
But behind this youthful façade, the population has been ageing by the day. The share of the elderly in total population has risen to 8.6% in 2011 compared with 5.6% in 1961. According to the ‘Population Projections for India and States 2001-2026’, this would increase to 12.4% by 2026.
Further, by 2050, every fifth Indian will be a sexagenarian compared with one in 12 now, bringing India to a position similar to today’s developed world in terms of the share of the elderly in population.
This comes at a time when India’s joint family structure – the traditional old age support and one of the five pillars of pension planning as defined by the World Bank – is disintegrating.
Ensuring the elderly have sustenance thus becomes an urgent imperative. The government has a window of opportunity to address this, with the demographics still favourable. Should this opportunity be lost, the fiscal cost of providing a basic pension to those without such a cover say three decades on would turn staggering indeed.
Changes in life expectancy and fertility rate leading change The situation the developed world faces today on social security for the elderly is due to two main factors – an increase in life expectancy and a decline in total fertility rate (TFR). India, too, is slowly moving this way. Life expectancy in India stood at 68.3 for 2015 (up from 62.5 in 2000) as against the global average of 71.4 and the highest life expectancy of 83.7 for Japan. Also, the life expectancy at age 60 was up at 17.9 in 2015 vis-à-vis 16.5 in 2000.
The country’s TFR, which refers to the number of children born or likely to be born to a woman in her lifetime, has decreased drastically over the years. The UN Population Division considers a TFR of 2.1 children per woman as the replacement-level fertility rate. As per the latest UN projections, India is expected to reach this TFR level by 2025-30.
The combined effect of life expectancy and total fertility rates can be seen through the old age dependency ratio, or the total number of elderly aged 60 years and above to the total population aged 15-59 years (multiplied by 1,000). For India, the old age dependency ratio as per 2011 census data stood at 142 -- or one elderly person for 7 people of working age. As per population projections, the old age dependency ratio will rise to 192 by 2026, implying we would have only 5 people of working age for each elderly. What’s more, the ratio varies across states – it is the highest for Kerala at 196. Higher fertility rate and lower life expectancy reduces the old age dependency ratio in some states.
Multipronged approach needed for holistic development of pension industry
To avoid the pitfalls of having an underdeveloped pension industry when the population is ageing, it is important that the government takes steps to develop the industry from now. Given the variations in terms of income groups and states, it is important that the government take a multipronged approach.
For the elderly among indigent poor, the government could evaluate a targeted pension scheme (TPS) using the Jan-Dhan, Aadhar and Mobile – the JAM trinity, a term coined by Arvind Subramanian, the chief economic advisor – in place of the current structure of sparing and varied pension.
Several factors have a bearing on the fiscal spending the government would need to incur. For instance, since females have been mostly dependent on their male counterparts, and have longer life expectancy (69.9) – versus 66.9 for males – it is implied that they would need increased social support from the exchequer.
Further, the government needs to take significant steps to include the gargantuan and uncovered unorganised sector in the pension fold. This could be done through a) allowing flexible payment and withdrawal options to make it affordable, b) offering monetary incentives, c) rolling out exclusive pension schemes for women, d) including insurance as part of the pension plan, and last but not the least e) spreading financial awareness and providing enough incentives for intermediation.
On its part, the organised sector, despite having a long history of some form of pension planning, suffers from inaccurate asset allocation – skewed towards debt – compared with both ageing economies (OECD) and young economies (non-OECD).
Now, the young population in India has a long-term investment horizon, which calls for greater allocation to long-term asset classes such as equity for wealth creation, to meet the needs in sunset years. Analysis shows that equity has the ability to generate stable positive returns over the long term, which could aid the young population in garnering an adequate vesting corpus that can see them through retirement years.
Additionally, the government can look at auto enrolment of people who are part of the ‘employee-employer’ set up but are not covered due to various reasons.
The development of the pension market should be holistic also from the perspective of adequacy of pension for the individuals during their sunset years. It will require accounting for market risk, longevity risk and inflation risk at both pre- and post-retirement pension planning to make the model really successful.
- By Jiju Vidyadharan, Senior Director, Funds & Fixed Income, CRISIL