Brazil’s pension system is one of the world’s most unsustainable ones—and an epicentre of its protracted recession. The global pension sustainability index (by Allianz) ranks it 49 out of 50 countries surveyed.
The same index ranks India only two spots better, at 47.On the face of it; it’s a surprising place for India to be. India’s savings as a percentage of GDP is almost double of Brazil’s; let alone the fact that it also isn’t in the throes of a recession. And unlike Japan (another poor performer), we have one of the world’s youngest population, and hence lower number of dependents that the system needs to cater to. Also, India has far lesser public debt than either Brazil or Japan, and, therefore, more fiscal space to support pensioners.
So, why red flags in India’s pension macroeconomics?
India’s pension conundrum has two sides to it. On one hand, not enough people are covered. And almost paradoxically; on the other hand, the government doesn’t have enough money to reach out to all of them.
India’s geriatric population, although only 8% in proportion; amounts to roughly 90 million. Of this, less than 20% are economically independent. Of the rest 70 million, the Indian government manages to provide basic life supporting sustenance to only 11 million financially vulnerable elders. And when it does, the average pay out is a meagre R400 per month.
Incidentally, this statistic of 90 million is expected to swell to close to 200 million old people over the next decade and a half.
As for the young and working in India—it is a 450 million strong workforce—who are presently taking care of the 90 million old; and will take their place over the next few decades. However, when they do, some 400 million, or 90% of them, will realise that having spent their lives trapped in the unorganised sector, they have been out of the government pension system and have no recourse to formal old age economic security.
Moreover, with rapid economic development, traditional family structures are breaking down, so they will not have the same familial safety net that was enjoyed by their grandparents. Also, life expectancy has significantly increased, which means that these ‘new’ grandparents are likely to live longer than their previous generation; and hence will need much more financial support.
So why can’t India tackle this head on?
At the heart of it, is the fractured labour market that we have inherited from a socialistic form of governance. Tough labour laws, unionism and stagnant industrialisation have led to a huge unorganised and self-employed sector. Over and above, public sector workers have had a more charmed existence than their private sector counterparts. Until the last decade or so, the 30 million strong public sector workforce had a wage and inflation protected pension plan that was tax payer funded!
The exchequer was bleeding dry, and the unsustainability of this led to the government in 2004 to introduce the New Pension System (NPS); that has now compelled some 2 million public sector workers to also contribute to their pensions, and expect more market-linked returns.
Meanwhile, most of the 20 million other salaried staff in India ruefully look at their payslips at the end of every month to see a part of their salary disappear from the ink on the paper to an opaque, gargantuan Employee Provident Fund—the traditional government pension fund that offers a fixed rate of interest every year that is decided by a risk averse board. Also, many Indians are known to withdraw these savings before retirement, defeating the whole purpose of old age security.
Finally, in the background to all of this, runs the mood music that is characteristic for so much of India’s economic history—the decadal triumph of socialist caution over common sense. Until recently, a closed sector implied the overbearing monopoly of an inefficient public sector pension provider; and the shooing away of professional fund managers for the huge government pension pots.
What it costs the government?
Overall it is estimated that the Indian government spends over 2% of its GDP on pensions. Incidentally, that’s more than what India spends on defence; and almost double of what the government spends on providing food security for two-thirds of its population.
To the government’s credit, it’s going in the right direction. The NPS is a sensible reform to get the unorganised sector involved. The pension industry has finally been opened up to private players, including 49% FDI. Given this liberalisation, introducing a dedicated pension’s market regulator is again sound policymaking.
However, despite these, pension still isn’t the new sexy—retirement assets are only 15% of GDP; probably alluding to other issues India needs to grapple with, including adequate financial literacy, commercial incentives and distribution networks. And of course, the biggest of elephant in the room has nothing to do with the pension industry per se. It is to tackle the problem of a burgeoning unorganised sector. The more the government is able to rescue 90% of the current workforce from unorganised to the formal sector; the easier it is to get them signed up for mandatory pension schemes that exist there.
Every month, around a million Indians are entering the workforce. The present run-rate suggests that 900,000 of them will slip into the informal sector. The government needs to provide enough skilling, manufacturing, jobs, and ease of doing business to prevent this trend from continuing.
What can India learn from other countries?
For firsts—don’t give pensions for free! If there is anything that India can learn from the pension crisis in Brazil—it is that when you spend around 13% of your GDP on pensions; early retirement ages and inadequate public contribution aren’t luxuries you can afford. Secondly, move towards more private participation. Depending on current workers to pay through taxes for pensioners isn’t very sustainable. Globally, most countries are moving to a system where households are increasingly nudged towards sharing investment risks on their pension funds, rather than the government assuring them a fixed return.
And finally, and very importantly—don’t waste the demographic dividend. Thailand’s pension sector, for instance, faces a similar problem as India—the coverage is sporadic, and the sector is in urgent need for reform. The only thing that makes it worse, is that Thailand has an ageing population; and as a result, lesser time in hand.
India fortunately has a window of the next three decades or so for reforming its pension sector—basically the duration of roughly one generation, without overtly feeling the pinch. But after that the demographic dividend will slowly start ebbing away. And gravity towards the bottom of global indices will increase rapidly.
The author is a senior economic adviser to a foreign mission,based in New Delhi.
Views are personal