By Moin Qazi
India is home to one-fifth of the worldâs population which includes a third of the worldâs poor and one-eighth of the worldâs elderly. Several million of them who spend their whole lives as informal workers have no retirement security other than the hope that their children will care for them in their old age. This arrangement worked well till the joint family structure was the dominant characteristic of Indian society. However, with new social norms erodingÂ the family-based system of support, old age care for low-income citizens has become a critical challenge. With underdeveloped annuity markets and poor financial literacy, these people face considerable challenges in making decisions for retirement planning.
Imminent need for a pension scheme
India is experiencing a demographic transition leading to lower fertility, increased life expectancy, and a consequent increase in the proportion of the elderly in the population. Traditional support systems for old people are gradually dwindling. Families are shrinking and transforming into nuclear units. Individualistic attitudes and rising aspirations with the accompanying changes in lifestyles are widening the generation gap. In urban areas, more and more women are taking up jobs thus constraining their traditional role as caregivers for the elderly.
According to India Human Development Survey (IHDS) Â of the National Council of Applied Economic Research Â (NCAER), 45% of elderly males and 75% of elderly females are currently fully dependent on others for sustenance. Indiaâs ageing population is expected to grow at more than double the rate of the general population. The UN Population Division estimates that by 2050, India will have 21.16% of the population above the age of 60 as compared to 60.34% aged between 15 and 59 years. Â Â Â
Researchers feel there is an immediate need for a reliable and convenient pension programme to address the old age problems of the poor. The main issues that need to be kept in mind are:
- Traditional systems of inter-generational care are either breaking down or are no longer perceived as reliable
- Assets, especially land and property, are seen as the best way to guarantee old-age security but seem out of reach for many poor people.
- Poor people usually have a low estimate of and little experience with their capacity to use savings as a route to old-age security
Possible alternatives and implementation
A pension is a financial tool for old-age income security. These are generally defined as monthly payments made on attaining an age of usually 60 to an individual to enable her/him maintain a decent standard of living post-retirement. Without this security, they are likely to experience health, housing and financial problems in their old age, adding to their vulnerability.
Â Â There are three broad types of pension products available in the world
- First pillar: Social Security Schemes
- Second pillar: Occupational Pension Schemes
- Third pillar: Individual Private Pension
In general, a pension scheme may be of a defined contribution (DC) or defined benefit (DB) nature. In a DC scheme, though contributions are explicitly defined, benefits are not. This is because the risks associated with investing contributions that are paid into the individual account, and then converting the value of the individual account into a regular retirement income stream, are borne by the individual. In contrast, in a DB scheme, the benefits to be provided are explicitly stated, while contributions are left undefined. In a DB scheme, it is the plan sponsor that bears the investment, mortality, and other risks.
For the poor and vulnerable, two types of pension could be provided.Â The first is a public or social pension, where the state raises revenue and redistributes to citizens when they reach a stipulated age in order to guarantee them a dignified life.The second is micro-pension, a personal retirement savings plan.Â People save a small part of their income individually during their working life that is invested collectively to generate periodical returns. When people retire their accumulated capital is paid out in monthly amounts. The first one has issues of viability. A possible solution could be a universal social pension with a fairly high retirement age so that expenditure is contained.
What is the target demographic?
Micro-pensions are financial products for old age income security targeted at people in the informal sector and other low-income groups who have varying, unstable incomeÂ and are often financially illiterate, thus having limited access to financial services. TheyÂare a powerful solution to insulate low-income earners against old-age poverty and provide them with the possibility to build a better, independent and dignified financial future.
Though informal sector workers may not âretireâ in the formal sense like employees in the organised sector, they need to prepare for the eventual reduction in earning capacity that will occur during old age, especially on account of ill health. Micro-pension, therefore, aims to provide an income stream to coincide with this decline in earning capacity.
Several studies have established that India has a very young and immature pension industry and a population that is not particularly keen to secure its retirement. A mere 7.4% of the total Indian population is covered under any form of pension plans, which is an alarming a figure in itself. India spends 1.45% of its GDP on social protection, among the lowest in Asia, far lower than China, Sri Lanka, Thailand, and even Nepal.Â
Securing income for those in need
The well-known microfinance expert Stuart Rutherford believes that âPoor people understand the purpose and value of saving. They sense that there may be a savings route to old-age security, and grab opportunities when they come their way. But they are beset by many difficulties, both in their own circumstances and in the financial services available to them, so that in practice success remains the exception rather than the rule.â
The pension system of the economy has to evolve quickly, particularly in aÂ country like India or else the economy will be left in a dire state. The biggest challenge ahead is the fact that almost 85% of the Indian labour is still deployed in the informal sector of the economy, most of whom are daily wage workers. It is extremely difficult to cover the informal sector employees under a national pension scheme. There are numerous government-supported micro-pension schemes but there several mounting challenges: the reluctance of people towards investing any part of their income over a large period of time, anÂ absence of regular income for clients, poor infrastructure and connectivity and remote spread of clientele.
Reevaluating schemes currently in place
Government schemes like the Pradhan Mantri Vaya Vandana Yojna (PMVVY) and the New Pension Scheme of 2003 are a few much-needed steps in the right direction. The National Pension System is slowly gaining popularity and expects a huge enrollment schemes from the informal labour segments of the economy. To determine how the long-term saving products might help solve the problem of old-age income security, an improved understanding of the behavioural, economic and institutional barriers to participation are required.
For micro-pensions to succeed, a delicate balance between economic viability, generation of adequate returns, and customised features for the participants is required. As the flow of income of low-income communities is uncertain or volatile owing to the nature of their economy, they should be offered a degree of financial flexibility providing for low or no minimum contribution requirements in order to encourage membership. However, contributions that are set too low or which are paid very unevenly may not provide sufficient income security. Experience with micro-savings indicates that low-income groups prefer lower-value and frequent deposits rather than infrequent larger-value deposits. As there are competing demands on their resources, it is difficult for them to accumulate large amounts. In order to facilitate the making of frequent deposits, convenient door-to-door deposit collection has to be provided. Mobile phones have transformed the landscape in a revolutionary way and this may not be a tall order.
An ideal micro-pension programme needs to address governance, design, administrative and efficiency issues to succeed and requires a multi-model implementation of micro-pension plans in addition to a separate set of regulations.
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