Meeting India’s Retirement Challenge By Richard Jackson Meeting India’s Retirement Challenge By Richard Jackson The Global Aging Institute does not take specific policy positions; accordingly, all views expressed herein should be understood to be solely those of the author(s). © 2018 by the Global Aging Institute. All rights reserved. ISBN: 978-1-943884-30-8 Cover photo: Kriangkrai, Adobe Stock. Global Aging Institute 913 Dalebrook Drive Alexandria, VA 22308 703-360-3281 | www.GlobalAgingInstitute.org Acknowledgments iv Introduction 1 Table of CHAPTER 1: CONTOURS OF CRISIS 5 CHAPTER 2: TODAY’S PENSIONS LANDSCAPE 11 Contents The Employees’ Provident Fund The National Pension System Other Contributory Schemes The Indira Gandhi National Old Age Pension Scheme CHAPTER 3: THE WAY FORWARD 21 A Framework for Retirement Reform Expanding Pension Coverage Strengthening Economic Incentives Preserving Retirement Savings Improving Investment Performance Rethinking the Payout Phase Building a More Robust Old-Age Poverty Floor Some Broader Challenges Conclusion 41 Technical Note on Data and Sources 45 Abbreviations 47 About the Author 48 Acknowledgments The author has accumulated many debts South Asia, Principal International); Ritesh while working on Meeting India’s Retirement Jain (Financial Controller, Principal Asset Challenge. He is pleased to be able to ac- Management Co. Pvt. India); Kim Thean knowledge the most important ones here. Soo (COO, Southeast Asia and India, Prin- Above all, the author is grateful to Princi- cipal International); and Lalit Vij (Managing pal International for funding the project and Director, Indian Mutual Funds, Principal As- for helping to ensure its success in countless set Management Co. Pvt. India). ways. In particular, he wishes to thank Luis In addition, the author wishes to thank Valdes (President & CEO, Principal Inter- Thomas S. Terry (Chairman, Global Aging national) for his confidence in GAI; Renee Institute) for his unwavering support and Schaaf (Senior Vice President & COO, Prin- Tobias Peter (Research Associate, Global cipal International) for believing in the proj- Aging Institute) for his valuable assistance. ect; and Eric A. Shimp (Assistant Vice Pres- Alison Bours (Principal, AliBDesign) de- ident, International Government Relations, serves credit for the design of the report. As Principal Financial Group) for his thought- always, the author is grateful to her for her ful feedback and helpful advice. unerring design sense, attention to detail, The author also benefited from discus- and willingness to work against tight dead- sions with members of Principal’s team lines. in India. For sharing their expertise, he is While the author gratefully acknowledges grateful to Mahim Bisht (Head of Business the assistance he has received in preparing Development, Principal Asset Management the report, he is solely responsible for its Co. Pvt. India); Pedro Borda (President, content. iv Meeting India’s Retirement Challenge ALTHOUGH RAPID DEVELOPMENT BRINGS GREAT BENEFITS, it also creates Introduction great challenges. Among the most critical is ensuring a measure of security for the old, who often find themselves vulnerable and marginalized as economic growth ac- celerates and traditional social and cultural norms are overturned. When rapid devel- opment is combined with rapid population aging, confronting the challenge becomes all the more urgent. India is one of the world’s most rapidly developing countries. Like most emerging markets, it is also progressing through the demographic transition, the shift from high fertility and high mortality to low fertility and low mortality that accompanies devel- opment and modernization. Since the ear- ly 1970s, the Indian fertility rate has fallen from 5.4 to 2.4, while life expectancy at birth has risen from 49 to 68. The result is an in- exorable aging of the population. Through- out India’s long history until the mid-1990s, the elderly, defined in this report as adults aged 60 and over, never comprised more than 5 or 6 percent of the country’s total population. By 2015, that share had risen to 9 percent. By 2050, the UN projects that it will reach 19 percent.1 (See figure 1.) 1. All national level population data cited in this report, as well as all population projections, come from the UN Pop- ulation Division; state level population data come from In- dia’s 2011 Census and other standard government sources. For references to the major data sources that GAI used in preparing the report, as well as to some of the more im- portant studies it consulted, see the “Technical Note on Data and Sources.” 1 Introduction On India’s current course, a by 2050, Chile’s is projected to reach 31 per- retirement crisis of potentially cent and China’s 35 percent. Even more importantly, India’s govern- immense proportions looms in ment is committed to addressing the chal- its future. lenge. The government began to take con- certed action in 2004, when it closed India’s As things stand, India is far from prepared. old pay-as-you-go civil service pension sys- The reach of its formal retirement system is tem to new entrants and replaced it with a limited, even by emerging market standards. system of fully funded retirement accounts. Just one worker in eight is now earning a One goal of the reform was to reduce the contributory pension benefit of any kind, ei- fiscal cost of civil service pensions, which ther mandatory or voluntary. The rest, most had become a growing burden on central of whom labor in India’s vast informal sec- and state government budgets. But the gov- tor, have little to fall back on for support in ernment also intended the New Pension old age except the extended family. But tra- System (NPS), as it was originally called, to ditional family support networks are already serve as a vehicle for expanding coverage. under stress from the forces of moderniza- tion, and will soon come under intense new India’s government is committed demographic pressure from declining family to addressing the challenge. size. On India’s current course, a retirement crisis of potentially immense proportions looms in its future. The Employees’ Provident Fund (EPF), In- Yet as daunting as the challenge is, there dia’s mandatory retirement scheme for non- are reasons to be optimistic that India will governmental workers, only covered and successfully meet it. For one thing, India still only covers a small sliver of the private- still has time to build a more inclusive and sector workforce. To fill the gap, the NPS, adequate retirement system. Although India now renamed the National Pension System, is due to age significantly, its age wave lies was in 2009 opened up on a voluntary basis well over the horizon. For the next decade or to the rest of the private sector. The reform two, it will enjoy a period of “demographic provided for several NPS options. Individu- dividend” in which falling dependency bur- al workers could open personal retirement dens and a large and growing working-age accounts, while employers could set up population lean strongly with economic corporate plans. Critically, there was also a growth. Even when its age wave rolls in, special scheme, known as NPS Lite, that was moreover, it will not be as large as those designed to appeal to lower-income work- in many of today’s other leading emerging ers in the informal sector. Although NPS markets. While the elderly share of India’s Lite is now closed to new entrants, another population is projected to reach 19 percent scheme, called Atal Pension Yojana (APY), 2 Meeting India’s Retirement Challenge FIGURE 1 India's Elderly Population (Aged 60 & Over), as a Share of the Total Population, 1950-2050 % FERTILITY LIFE RATE EXPECTANCY % - . % - . % - . % % % % % % % % % % % % % 6 8 Source: UN Population Division, World Population Prospects: The 2017 Revision (New York: UN Population Division, 2017) has replaced it. The goal of these initiatives, erage on a voluntary basis. Given the high as India’s Finance Minister recently put it, is level of informality in India’s labor market, to transform India from a “pension-less” to mandating universal coverage is simply not a “well-pensioned” society.2 a practical option. Finally, the government India’s overall approach to reform is the is correct to reject pay-as-you-go financing right one. The government is correct to in favor of full funding. As societies develop focus on expanding the share of the work- and age, funded pension systems, in which force that participates in contributory re- workers’ contributions are saved and in- tirement schemes. Although India will also vested and benefits are paid out of the ac- need to strengthen its noncontributory so- cumulated assets, have important economic cial pension system, which serves as a final advantages over pay-as-you-go pension sys- backstop against destitution in old age, in tems, in which current workers are taxed to the long run only widespread participation pay for the benefits of current retirees. At in contributory retirement schemes can en- the micro level, funded systems can gener- sure widespread retirement security. The ate higher rates of return and hence high- government is also correct to expand cov- er replacement rates than pay-as-you-go 2. Quoted in Hemali Chhapia, “From ‘Pension-Less’ to ‘Well-Pensioned’ in 10-15 Years,” The Times of India, August 24, 2015. 3 Introduction Although there has been some majority of Indians are still saving nothing modest progress in expanding for retirement, and of those who are sav- ing something most are not saving enough. pension coverage, the great Without new and more ambitious reforms, majority of Indians are still saving tens of millions of Indians will reach old nothing for retirement. age over the next few decades without pensions, personal savings, or children to support them.