Ballooning inflation and burgeoning employees in the government sector have resulted in increase in the number of retirees. Their pensions eat huge chunks of the government’s budget. A bigger problem is the many more who work outside the public sector and lack pension coverage.
The government changed the pension component for its employees from defined benefit to a defined contribution scheme. This essentially meant the amount to be contributed, was at a certain determined percentage of the employee’s salary and the government would contribute a certain amount. But unlike the old system, this is not index linked, ie., not related to inflation.
Ageing population and increased life expectancy
India has a population of 140 crore. Of this, about 55 crore are working and in this 9 per cent work in the government. Almost 90 per cent of the workforce does not have a formal pension. The country is slowly moving to a scenario of a growing ageing population. Majorly they are not covered by any pernsions and are not prepared for the period when they move out of active work life. Several developed economies already face this issue, but they have several social cushions to support the lot.
In 2020, people above 60 years were 10 per cent of population (about 14 crore). In the year 2000, it was 7 per cent of a population of about 100 crore. In these 20 years, the senior citizen population has doubled! In 2050, the population is estimated to go upto 161 crore and thereon decline till 2100. Senior citizens will form about 19 per cent of this population at around 32 crore.
Life expectancy in India has increased manyfold. In 1950, it was 35 years and in 2020 it had doubled to 70. It is projected that by 2100, life expectancy is likely to be around 87. Higher life expectancy, coupled either with or without pension, will be a huge cause of stress for the government. Added to this, support systems in the form of family and community are slowly diminishing.
Pension fund just 3.9 per cent of GDP
The government is aware of the problems and has been taking steps to address the issue. Central and many state governments have come out with pension schemes for targeted sections of the society. The payouts are small because of the large numbers involved and certainly may not be sufficient to take care of individual livelihoods.
To cover the large population in private jobs, New Pension Scheme (NPS) was extended to the public at large in 2009 and to the corporate sector in 2011. A new regulator exclusively for pension was created, Pension Fund Regulatory and Development Autority (PFRDA). In 2015, the government came up with a massive thrust for financial inclusion. Following this, came Atal Pension Yojana (APY), a low cost guaranteed return plan meant for the general public. Among the other schemes like bank account opening and insurance that were launched with this, APY has seen the lowest enrolment and has covered only close to 10 per cent of the workforce. But this is only a beginning.
Looking at the subscription in APY one inference is the lack of surplus funds with majority of our population. Though one could go upto a target pension of Rs 2000, a substantial portion have opted for the target of Rs 1000. This aspect must be considered and planners can come up with instruments that suit the target audience.
A PFRDA research paper shows that in OECD countries, pension assets were about USD 34 trillion, constituting 63 per cent of the GDP. For some OECD countries it is over 100 per cent of GDP. In India it is 3.9 per cent of GDP. An opportunity to get substantial funds into the system that could go for development activities must be focussed more sharply and executed with rigour.
