By creating an integrated product basket, and by Using the India stack to make saving easy, India could lead the way on comprehensive social security inclusion
By Craig Churchill & Gautam Bhardwaj
The most common refrain when we discuss long-term retirement savings by non-salaried informal workers is around affordability. With such fragile and modest incomes, how can we expect street vendors, construction workers or farmers to save, or save enough for a 20-year retirement?
This is perhaps true for those living below the poverty line today. Most of them may indeed be constrained to rely entirely on support from children or the government when they are too old to work.
But, the majority of India’s informal sector workers are not in this category. Domestic help, milk farmers, auto-rickshaw drivers, shopkeepers, MSME workers, fishermen and Ola drivers are both economically active and aspirational, and can afford to save. Even more importantly, as most of them are still in their 20s or 30s, they have enough time at hand to build up a large enough retirement corpus, even with fairly modest contributions.
Which brings us back to the common refrain. If that were indeed the case, why don’t we already have 200 million National Pension Scheme (NPS) accounts? And, why did millions of urban migrants have little or no savings to withstand the lockdown even for a few days?
Answers to questions around retirement savings capacity and NPS traction may lie outside the NPS.
Like everyone else, non-salaried workers are vulnerable to a range of lifecycle risks. These can cause a sudden spike in expenses, or a sudden dip in income, or both. Many risks are insurable and salaried workers are usually insulated from their impact through a mix of insurance, pensions and other employee benefits.
However, such benefits are not available to non-salaried workers—who form the bulk of India’s 500 million paid workforce. Most non-salaried workers are simply uninsured.
So, what does an auto-rickshaw driver do, if someone in his family has an accident or urgently needs an operation, but does not have any insurance? He first withdraws all the money he has saved up for some other purpose. If these savings are not sufficient (as they rarely are) to fully cover the cost of the treatment, he is forced to take an expensive emergency loan from a neighbour or a moneylender to make up the balance.
Thus, he uses a mix of savings and credit as a proxy for insurance to pay the full cost of an otherwise insurable risk. Ideally, he should have paid less than 5% of this amount as an insurance premium, and transferred the full cost of this risk to an insurer.
As a result of just one, fairly common lifecycle event, he needs to restart saving for his original goal from scratch. But, he cannot restart saving immediately as any surplus income over the next few weeks is now pledged to repay the expensive emergency loan.
When the next crisis hits, he usually repeats the same cycle.
Zero risk protection has serious behavioural and financial consequences for the auto-rickshaw driver and his family. First, successive emergencies wipe out past savings and prevent him from building a better future for his children. Second, he is forced into a vicious, perpetual debt trap that consumes most of his surplus income and further compromises his ability to save. And third, even if he decides to save for his old age, the prospect of an illiquid retirement product like the NPS will appear unattractive to him.
As the chairman of India’s Pension Fund Regulatory and Development Authority (PFRDA) has also observed recently, long-term savings need to be layered with insurance. This would help cover large, unexpected losses, such as the death of a breadwinner, or lost income due to a crop failure or a health crisis.
As things stand, however, most insurance products for the working poor are usually linked to loans. Therefore, one needs to be in debt in order to have risk protection, which seems counterintuitive. Instead, we need insurance that is linked to savings. Insurance that covers the cost of risks that ordinary people most frequently face, or are most concerned about, and which keep them in poverty and prevent them from saving.
It is feasible to develop an integrated social security solution, where every Rs 100 that an auto-rickshaw driver (or a maid, farmer or shopkeeper) saves, is automatically distributed between NPS, a liquid mutual fund and insurance. Once such a product is in place, it will be important to work out the logistics of how it can become rapidly available to all underserved segments.
Here, India clearly has an edge over most other countries. A combination of India Stack, smartphones and open digital platforms have placed the country in a very unique “tech moment”. It is more feasible today than ever before to roll out a fully digital social security solution for informal workers. Adoption at scale should not be challenging as millions of everyday Indians across urban and rural locations are already embracing digital channels.
UPI will of course be essential for success. Once it becomes even more broadly accessible and used by underserved segments, it would enable seamless transfer of micro savings, directly from mobiles to well-regulated fund managers and insurers. UPI can then be used also to deliver liquidity, insurance claims and retirement benefits.
By creating an attractive, integrated product basket, and by making it as easy to save as it is to send a WhatsApp message, India could lead the way globally on comprehensive social security inclusion. This will help excluded citizens achieve much needed risk protection for today. And, release a larger share of their incomes to better prepare for a more secure and dignified old age.
Churchill is chief, Social Finance Programme, ILO, & Bhardwaj is co-founder of pinBox Solutions, Singapore