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FEATURE STORY February 21, 2019

Schemes To Systems | Mind the Gap: Ageing and Pensions


Only 12 percent of Indians are covered by a formal pension scheme.

Picture by Graham Crouch/DNDi

While India is often characterized as a young country, by 2050, every fifth Indian will be above the age of sixty.  An ageing population, with fewer children to depend on and changing family structures are creating one of the most important policy challenges for India. The question is: will India be able to ensure sustainable financial protection and dignity for its 104 million elderly - whose numbers are growing every year - by the time this demographic transition is complete?

The task will not be easy. Retirement support through pensions is crucial to any package of elderly support. At present, the gap between those who have pensions and those who don’t is huge. Only 12 percent of Indians are covered by a formal pension scheme. As a result, The problem is further compounded by rising life expectancy -nearly two decades at age 60 today, and the tiny savings of excluded individuals. Evidence from various sources suggests that those between 50 and 60 years of age do not have adequate pensions or retirement savings to support themselves for more than two years after they leave the workforce. Most of India’s elderly rely on a combination of physical assets and informal family-based arrangements for support.

There are two tools to support the elderly when earnings cease. First, contributory pension programs - such as the National Pension Scheme (NPS) and the Atal Pension Yojana (APY) recently announced by the central government - can cover a considerable number of those who have the financial capacity to save for their retirement. However, such programs only suit a small number of people, either formal employees or those who have the wherewithal to save. In contexts where savings are low and incomes irregular, the second tool - tax-funded unconditional cash transfers, also known as social pensions - become important to secure the future for those who are already old or who do not have the capacity to save for their old age. Evidence from countries such as China shows how rural social pensions tend to free up some of the support provided by children while also increasing health care consumption of the elderly.   

"Most of India’s elderly rely on a combination of physical assets and informal family-based arrangements for support post retirement."

In India, social pensions have emerged as a key tool to protect the elderly poor –serving nearly 23 million people. This is in keeping with global trends where old-age tax financed social pensions have proliferated over the last two decades. At the same time, contributory schemes have made important progress. The number of subscribers for NPS Lite and APY - targeted to weaker economic segments and unorganized workers have increased to nearly 15.7 million as of July 2018.  But despite this expansion, coverage remains low -- at barely four per cent of India’s 391.4 million unorganized workforce. Survey data across Delhi and Odisha suggest irregular incomes and behavioral rigidities in accessing financial and savings products can explain low uptake. If this continues, .

To prevent this from happening, state and central governments will need a two-pronged approach -

  • The current young workforce must be encouraged to save for their old age by enrolling in long term retirement savings products such as APY. This could be done by encouraging individuals with PMJDY bank accounts to join contributory pension programs through new fin-tech tools. Such mass mobilization can allow India to generate strong volume of long-term retirement savings for the country.  Such encouragement will need concerted efforts to make enrollment processes easier, testing auto-enrollment options, sandbox pilots and boosting consumer confidence in financial products. Testing methods of auto-enrolment for the nearly 400 million Aadhar-seeded Jan Dhan Bank accounts can yield rapid results. The growth of digital transactions in India–where savings and monies can be transferred in a transparent and flexible manner –shall enable a new model of citizen-friendly and sustainable mode of pension financing which does not rely on payroll-taxes.
  • For those who are already old or do not have the financial capacity to save for their twilight years by contributing to NPS and APY, tax-funded old age pensions must be enhanced. While many states have opted for near-universal eligibility criteria for social pensions, surveys highlight challenges in translating policy into practice due to cumbersome enrollment processes. Adequacy levels of India’s pension benefits are lower than most middle-income countries. On a scale of 100, the Mercer Global Pensions Index on scores the adequacy of India’s pension benefit levels at 38.7, while China and Brazil receive a score of 53.4 and 72.5 respectively. Scaling up pension benefits and coverage needs to be pursued at mission-mode pace. The lives and dignity of an entire generation of India’s elderly is at stake.  

The article has been authored by Gautam Bhardwaj, Co-Founder, pinBox Solutions, Varsha Marathe, Senior Financial Sector Specialist, World Bank and Robert Palacios, Social Protection Lead Specialist, World Bank. An abridged version of this article was originally published in the Hindustan Times on February 20, 2019.