India is the last large country in the world to experience ageing. But when it comes, it is going to be a crisis. In 2026, 14% of the population will be above age 60. The situation on poverty among the elderly is grim. As Robert Palacios has shown in a recent paper, we do not see very high poverty amongst the elderly today for a tragic reason: mortality rates for the elderly poor tend to be much higher. A series of household surveys have demonstrated that most people in India are not preparing for old age. Formal pension systems are essential for encouraging, enabling and pushing young people to put money aside for old age. Formal pension systems must harness high returns of equities and corporate bonds, and reduce risk through international diversification. While EPFO is mandatory for private firms with more than 20 employees, a limit which has recently been dropped to ten employees, it is a failure when it comes to the delivery of old age income security. On average, a person exiting the EPF walks away with Rs 25,000. This number does not produce an adequate annuity for his remaining life, for a lifespan that is elongating through improvements in health. For a person to command a pension of Rs 1,000 a month in old age, the pension wealth at retirement date has to be roughly Rs 1.5 lakh. For all the noise about EPFO, it ultimately signifies nothing.
The way forward involves two things. The first task is that of building the New Pension Scheme (NPS), setting up its promised IT systems, and actually translating the promises of an efficient low-cost system into reality. This system will serve civil servants and the unorganised sector. The second task is that of reforming EPFO. The most important element of this task is the removal of trade union leaders and representatives of employers? associations (such as Ficci or CII) from the central board of trustees. Neither of these groups has competence on the complex issues of pension economics and finance. The UPA has floundered on both tasks. Promises about NPS as a top-quality pension system have been made for a long time, but actual action has been weak. Owing to the baggage of the Left parties, reforms on EPFO were out of the question. Towards the fag end of India?s window of opportunity on the demographic transition, these mistakes are very costly.
