Securing India’s ageing population

As India witnesses sustained periods of growth, a significant part of the population is expected to live longer than ever before. This essentially would mean that the dependency on the national pension system would be longer after they exit the labour market, adding pressure both on the government and the senior citizens.

It is estimated that by 2050, there will be more people older than 60 years than those below 15 years. The share of the population over the age of 60 is projected to increase from 8 per cent to nearly 20 per cent in 2050. Fulfilling needs for services and social protection for senior citizens and creating avenues of income should be looked upon as a matter of national priority.

According to a report by the Ministry of Statistics in 2018, the number of citizens over the age of 60 jumped 35.5 per cent, from 7.6 crore in 2001 to 10.3 crore in 2011. This is an all-time high since 1950, and is almost twice the rate at which the overall population grew. In the same period (2001-2011), India’s overall population grew by 17.7 per cent. This shows that ageing will emerge as a key social challenge in the future.

India’s age dependency ratio is also growing, standing at 14.2 against 10.9 in 2001. Age dependency ratio signifies the ratio of older dependents (above 64) to the working-age population (15-64). In contrast, ageing economies such as Japan have an age dependency ratio as high as 42 while Belgium has 28.

Dwindling financial security

India, despite being No 2 country by population, has negligible social security. Many developed and emerging economies offer reasonably well-rounded social security mechanisms; their citizens perhaps do not mind paying higher taxes on salary.

Amidst the rise in the number of senior citizens in the country, interest rates on savings are falling and touching an all-time low. In January 2019, it stood at 6.5 per cent; in July 2020, it was at 4 per cent. The recent downfall cannot be squarely be attributed to the emergence of Covid, as the fall started almost a year before the pandemic crept into India. While the fall in interest rates should have enthused borrowers, there is hardly any perceptible demand for credit. Post Covid, problems have naturally been aggravated, the spillovers of which may exhibit further fall in the rates in the coming months.

Adding to the woes are reports from the Employees’ Provident Fund Organisation (EPFO), which anticipates the interest rate to fall below 8.5 per cent as specified for FY20, due to falling return on investments and tepid cash flows. In FY19, the interest rate stood at 8.65 per cent. The EPFO, which was previously into debt instruments alone, today invests 15 per cent of the corpus into exchange-traded funds. This fall is especially going to impact the payout on retirement savings of more than 60 million subscribers.

The EPFO is not alone, as the Public Provident Fund (PPF) rates are also due to slip below the 7 per cent mark, which would be the lowest since 1974. Analysis shows that, in 2019-20, the Central government reported a fiscal deficit of 4.6 per cent of GDP against the planned 3.5 per cent, and the gap may widen further due to the ongoing crisis. In the last few months of this financial year, both the Central and the State governments have decided to stall the increase in dearness allowance and dearness relief that was due to its employees and pensioners. An indirect effect of this loss of income would lead to reduced spending by this category of people, therein impacting country’s economic growth.

Retirement age

While in India, the age for retirement in a majority of government-owned institutions is 60, there are economies like Germany, the US, the UK, Australia, China and Japan that are progressively increasing their retirement age. In fact, in the case of Japan, it is moving from 66 to nearly 70 years. This has been largely to utilise the experience and knowledge of those at the top for a few more years.

India, for that matter, has Central universities where superannuation is at 65 or 70 years. Raising the superannuation age of personnel above a threshold rank could be considered to gain from their expertise. The government may also consider waiving the cooling period for taking up any commercial job after retiring from government, statutory bodies, PSUs or banks.

Another benefit of raising the retirement age would be the government’s ability to reduce the burden of paying for pensions, especially at a time when it is facing challenges to keep the exchequer in good health. According to a recent study by the Centre for Development Studies, raising the retirement age by just two years to 58 in Kerala would help the State government save around ₹4,625 crore a year in pension and gratuities.

It may be noted that the pension and other retirement benefits of the Centre and the States have increased by almost three times between 2009 and 2018. In fact, the Central government’s pension expenditure is more than its salary expenditure.

Another possibility could be to emulate the model of countries where better social security is provided. Some of these include pension funds, like the French Solidarity Investment Fund, the Canadian Pension Plan Investment Board and the HESTA in Australia. While these are in different geographical set-ups, learning from them could help strengthen the security for senior citizens who suffer from the fall in interest rates.

There would be many naysayers to the proposal of raising the retirement age in government organisations. It could be made feasible to only those who have passed a threshold in their career and can further contribute for another two-three years to begin with, to test the waters and understand the implications on the government. It may also be noted that the number of government employees is far less than those in the private sector. According to 2018 data, the department-wise estimated number of Central government civilian regular employees in India stands at 31.18 lakh only, out of which 40 per cent alone are from the Railways.

While government jobs ensure security, take-home salary is modest, and employees contribute towards their retirement. A perennial fall in interest rates, hence, causes anxiety for senior citizens, mostly superannuated government employees, who would typically park their savings in bank fixed deposits. Securing this class of society should be of paramount importance.

It may also be mentioned that comparing interest rates of developed economies with India, is like comparing apples and oranges — the former have robust social security and healthcare systems, which is absent here. We should progressively look to create an atmosphere where people not only have jobs, but also adequate savings in their old age.

The writer is an Economist with India Exim Bank. Views are personal

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