Pensioners aren’t having a free lunch

M.R. Narayana | Updated on March 12, 2018

Old workers pension


The elderly do, in fact, partly pay for their pension through their labour and indirect tax payments.

The Report of the Working Group on Social Security for Twelfth Five Year Plan (2012-17) has reiterated, among other things, the need for old-age income security for unorganised workers, now accounting for 94 per cent of India’s labour force (about 488 million).

Lack of employability, disintegration of the joint-family system and decline in other built-in family supports are the most important justifications for old-age security. The Working Group recommended a mandatory provision, but not a specific amount of old-age pension for every unorganised worker in the country, to be funded jointly by employers, employees and institutions, including government.


Public debate on the needs and amount of old-age pension for unorganised workers is not new in India.

Way back in 2005, the National Commission for Enterprises in the Unorganised Sector (NCEUS) had recommended a monthly pension of Rs 200 to all workers older than 60 years from poor families, that is, those below the poverty line.

Most recently, Pension Parishad, a non-governmental initiative to ensure universal, publicly funded, non-means-related and non-contributory pension to all unorganised workers in India, has demanded a uniform amount of Rs 2,000 a person a month in the pensionable ages: above 55 years for men; above 50 years for women; and above 45 years for specially deprived communities.

About 100 million people are expected beneficiaries of this proposed scheme. However, the number of beneficiaries is reduced to 80 million, if the income-tax payers are excluded, and the benefit is extended to all above 60 years of age.

Plausible estimates of the financial implications of the above pension proposals can be obtained by using a new economic-demographic methodology called National Transfers Accounts, developed by Profs Ronald Lee at the University of California in Berkeley and Andrew Mason at the University of Hawaii. The methodology is useful for calculating the age profiles of labour income, pension payments to unorganised workers and indirect taxes paid by the elderly population. Using the relevant age profiles for India in 2004-05 and the GDP at market prices in National Accounts Statistics 2011, the financial implications are calculated for the proposed universal old-age pension scheme by Pension Parishad (for Rs 2,000 a worker a month) from 2004-05 till 2009-10.


The results are interesting. The ratio of the elderly labour income to the GDP is lower than the ratio of old-age pension payments to the GDP in all years. The ratio of old-age pension payments to labour income increases from about 688 per cent in 2004-05 to 696 per cent in 2009-10.

The share of old-age pension payments in total indirect taxes paid by the elderly population ranges from 607 per cent to 365 per cent. These figures indicate the substantial resource requirements as well as implicit and partial indirect-tax financing of the old-age pension payments by the elderly population themselves. For a given amount of pension in 2004-05, all the ratios, except the ratio of pension payments to elderly labour income, decline between 2004-05 and 2009-10. The decline is due to faster growth of GDP, its resultant increase in private consumption and, hence, the increase in indirect tax revenues.

The increasing ratio of pension payments to elderly labour income shows the total requirements of public resources for the universal old age pension for unorganised workers in relation to their labour income.

The proposed amount of old age pension by the NCEUS (Rs 200) and Pension Parishad (Rs 2,000) may be considered the lower and upper bounds for pension payments to unorganised workers. Accordingly, the estimates can accommodate a wide range of policy options, which can be equated with old-age pension payments to unorganised workers.

For instance, amount of old-age pension payments to unorganised workers can be equal to (a) Rs 407 in 2004-05 (NSS 61{+s}{+t} round) and Rs 731 in 2009-10 (NSS 66{+t}{+h} round), if equated with the weighted average monthly per capita consumption expenditure to meet with the officially fixed minimum calories requirements; and (b) Rs 696 in 2004-05 and Rs 1,195 in 2009-10, if equated with average monthly per capita consumption expenditure.


Unfortunately, the demands for universal old age pension for unorganised workers in particular, and elderly population in general, are misunderstood to be entirely financed by taxing the working adults.

This misunderstanding must be cleared in the minds of policy makers and adult tax payers by making them aware of the valuable economic contribution of India’s elderly population towards labour income as well as consumption-based taxes.

Indeed, the elderly unorganised workers must be recognised for paying indirect taxes because this does implicitly and partially pay for their proposed publicly funded, non-contributory, non-means-related and universal old-age pension scheme.

(The author is professor of economics, Institute of Social and Economic Change.)

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Published on June 19, 2012
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