And now, the pension deficit

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New Delhi | Updated: January 7, 2015 1:58:06 AM

Pension costs on the exchequer could be as high as 4.1% of the gross domestic product (GDP)...

Pension costs on the exchequer could be as high as 4.1% of the gross domestic product (GDP) by 2030, the same as fiscal deficit estimated for the current fiscal, warns Crisil, reports fe Bureau in New Delhi.

If a social security net doesn’t get built starting right now through a vibrant private-sector pension programme, the government will have to bear a heavy fiscal burden — between R7-12 lakh crore or 3.4-4.1% of GDP by 2030 — due to the pension Bill, according to a Crisil Research study released on Tuesday.

The country’s 60-plus population is estimated to grow from the current 100 million to 180 million by 2030 and to 300 million by 2050.

Pointing out that the introduction of defined contribution formula under national Pension System (NPS) for government employees in 2004 was indeed a smart move, Crisil said this will trim the government employee pension burden to 0.7% of GDP by 2050 from 2.2% of GDP currently. (The NPS has been accepted by large sections of central government employees and most state governments have shifted their employees to the new system.)

The main problem lies with the private sector, where currently only 8% (or 4.8 million) of its retirees get a pension.

CRISIL Research has built a best-case scenario where pension coverage expands such that 70% of the private-sector retirees by 2030 (63 million) will get a pension compared with just 8% now.

pension-graph

Even if this happens, and the government has to provide pension to only 30% of the old, in addition to retired government employees by 2030, its pension bill will rise by 120 basis points to 3.4% of GDP by 2030 from around 2.2% currently, assuming each pensioner gets Rs. 2,000 every month. Currently, the government provides pension to only 19% of the old under Indira Gandhi National Old Age Pension Scheme. On an average, these pensioners get a meagre Rs 500 per month. The proposed targeted pension scheme envisages a payment of Rs 2,000 per month.

Under the worst-case scenario, if private-sector coverage stays chronically low at its current level of 8% even by 2030, the government will have to formulate a pension scheme to support the entire population of the old. This will raise the fiscal burden to as high as 4.1 % of GDP, assuming a monthly payout of Rs. 1,000 per pensioner – or half the amount in the best-case scenario. While all old citizens will receive pension through such a scheme, the amount each one gets will be significantly lower than in the best-case scenario because of the sheer number of dependents.

And, if the government is to give pension matching the best-case scenario (Rs 2,000 per person instead to Rs 1,000), its fiscal burden will surge to 6% of GDP by 2030.

Roopa Kudva, Managing Director & CEO, CRISIL, said: “In either event, the fiscal burden of pension ranging from 3.4% to 4.1% of GDP in 2030 is high. In comparison, the central government today spends 3-3.4% of GDP on education and just over 1% of GDP on medical and public health, water supply and sanitation.”

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