Post #16: pension insecurity in India

A current -- and a future -- old Indian. Will either of them gain a measure of financial security?

For many generations, Indian families have provided primary support for the elderly.  Now India is changing rapidly. Will India's public policies change with the times? It looks like a steep climb ahead. A big change here would not only buck old cultural traditions but also the current economic thinking of a lot of the political elite.

For years now many international organizations, think tanks, and governments have promoted neoliberal economic development policies. A generation ago India took steps to dramatically liberalize and open up its economy -- with generally positive results. This freed the country from some of the worst features of its old, overly bureaucratic straightjacket, thereby spurring growth, job creation, and movement from the rural areas and to cities. The country still suffers from the bureaucratic "license raj". It seems to take forever to start a business much less build a highway. Nonetheless many Indians have benefited from the changes.  There is less abject poverty, higher living standards, and more growth. That's important.

So economic liberalization has had a very positive side for India. There are, however, downsides -- and we're not just talking about the air pollution! Part of the liberalization message is to minimize government activities. In India, investments in social programs -- education, health and public pensions -- are very low. Public governance systems have grown weaker and weaker over the past couple of decades, as privatization spreads.

India is a poor country, yet many other countries in similar economic circumstances are doing much more in social policy development. India's leaders have been quite timid about adoption of major public government initiatives. Unfortunately, it seems very likely that the next elections will push the country even further to the right. 

The public pension situation is a good example of the dominance of neoliberal philosophy in India. Expanding retirement savings fits nicely into neoliberal thought -- personal responsibility, small government expenditure, limited long term government exposure. India's policies fit this framework. Formal workers -- only 10% of the workforce -- generally have pension coverage, but mostly in the form of a large personal savings program. It is not a great foundation of support but better than nothing. The lmuch arger problem is the 90% of the workforce in the informal sector -- the farmers, construction workers, rickshaw drivers, small shop owners, small factory workers, etc. They mostly have nothing for old age beyond their children -- and government is doing little to prepare for the inevitable demographic and family shifts that are well underway. Thre does need to be a major increase in retirement savings, but that won't happen without major government intervention. And as of now, there's also very little talk about creating a foundation of income support for the elderly to complement retirement savings.

In the middle of the 20th century, the US was allocating well over 2% of GDP to Social Security and tax incentives for private pensions.  India currently allocates squat, and seems to be sleepwalking into the 21st Century when it comes to pensions. Not so China, Korea, Thailand, even poor Nepal. Wake up, India!

We have spent a fair amount of time in India meeting with folks and researching this issue.  Ken has given several talks on this topic, with more to come, all part of an effort to help spark a larger debate. An uphill climb...

Below is an op-ed by Ken that was published in MINT, the big business newspaper in India that is connected to the Wall Street Journal (this certainly wouldn't have made it into the WSJ!):

Many of India’s growing elderly population face serious financial challenges. It is imperative that India institute a long-term strategy to strengthen the economic security of the elderly. While steps have been taken to provide pension security for some citizens, India still has a very long ways to go to prepare for the future.

As a very young country and one with a long history of family support for the elderly, India has understandably focused on issues other than elderly pensions. According to NCAER’s India Human Development Survey (IHDS), about three quarters of the elderly now live with married children or other relatives.  

India is changing, however, and programs and policies must also change. India’s aging population is expected to grow at more than double the rate of the general population. In addition, more elderly Indians, particularly women, are economically vulnerable. According to the IHDS, 45% of elderly males and 75% of elderly females are currently fully dependent on others for sustenance, and the same NCAER survey shows that vulnerability is particularly high in urban areas which are experiencing rapid population growth. The economic transformation that is taking place in India calls into to question whether the family-based system of support will continue over the next century.

Many countries are making major strides in providing basic economic security in old age. China is moving closer to a universal pension system – extending basic coverage to a quarter billion people over the last few years. Bolivia and New Zealand have already instituted universal pensions, covering virtually all older citizens, and Nepal and Thailand are also taking major steps in the direction of universal social pensions for its elderly. Is it time for India to explore universal options?

India has already taken some actions. Many in the formal workforce have some pension coverage. In addition, a tiny share of informal workers is enrolled in retirement savings schemes supported by the central government (NPS-S). A small share of very poor elderly receives social pensions of 200Rs a month, rising to 500Rs a month after age 80. While most states supplement these amounts, the scope and depth of coverage is too often meager. There is still no basic system of economic security - beyond families - for the vast majority of elderly Indians.

While the analysts debate policy options, almost no major public debate is taking place on this topic. The silence from political officials is deafening, possibly because the problems seem too far away to deal with now. Real problems are emerging that need public action.

What should India do? I would propose four important steps:

First, to prepare for the upcoming demographic transition, India must find the way to greatly expand retirement savings for the informal workforce. Unless many more Indians increase retirement savings very soon, future generations of elderly will be at real financial risk.

What’s needed is a universal retirement savings account for informal workers: greater government financial incentives to encourage participation; better access to micro-pension financing models; flexible contribution schedules; and better financial information to educate Indians on the need for expanded retirement savings. India should set a target of encouraging 50-100 million informal workers to start these accounts.

Second, while instituting a more universal retirement savings system is essential, by itself it will never be more than a partial solution. Retirement savings accounts will be too small for most workers to live adequately in retirement, particularly lower income workers and today’s middle-aged workers -- who either won’t have the time or the resources to accumulate sizeable assets. India must therefore complement a stronger retirement savings approach with some form of a lifelong foundation of public support for all of the elderly.  Given the size of the India’s informal workforce, payroll tax financing used by many other countries won’t work, and small targeted programs clearly won’t meet the core financial needs of most of India’s elderly.

What’s needed is a universal (or near universal) social pension: a flat non-contributory pension for everyone over a certain age. India should build the full delivery infrastructure now, but keep monthly benefit levels very modest and start with a fairly high retirement age. It is always easier to liberalize programs over time than it is to scale them back.

Third, India should link both of these new approaches directly to the new universal ID that is now under development. In the United States, the creation of a universal Social Security number in the 1930’s was an important reform that ultimately enabled the integration of the nation’s pension, finance and taxation systems. A universal ID tied to universal pensions can be a great mechanism to help India handle its upcoming demographic transition. 

Lastly, pension security takes very long term planning – by individuals and by governments. India needs to start planning to make fiscal room for these initiatives by setting mid-century budget targets for pensions for the informal workforce. In very crude terms, by 2050, modest universal social pensions will probably necessitate spending about 1% of GDP, and universal retirement savings accounts might cost an additional 1% of GDP.  If India does not start to plan now for these eventualities, it will find itself in much deeper hole by 2050.

The 21^st Century has the makings of an “Asian Century”. India’s future policy and economic decisions will be a key. Can India be an important player on the international stage and still not provide basic economic support for the elderly? The time to plan -- and then to act -- is now.

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One of the several Indian families who have come up to us in public places asking to take our picture.
We are still curiosities to many Indians, particulary those from outside the big cities.
We often follow up by asking them to join us in the picture. A nice way to share warm connections.