Future tense: Time to build pension net for millions

Fiscal burden of pensions can be 3.4% to 4.1% of GDP by 2030

A CRISIL Research study shows that there are nearly 100 million people aged over 60 in India today, and that number will triple to 300 million by 2050. In other words, every fifth citizen will be a sexagenarian compared with every twelfth now. The worry is that most of them will be financially insecure in their sunset years if a social security net doesn't get built starting right now. And if a large number of the old end up having no pension by 2030, the government will have to bear the heavy fiscal burden of providing minimum sustenance to them. A multifold increase in pension coverage to the private-sector workforce is therefore an imperative.

With the focus on India's demographic dividend, the fiscal cost of ageing is not at the forefront of discussion. However, unless addressed, this cost can be onerous in coming decades, says Roopa Kudva, Managing Director & CEO, CRISIL.

Government employees joining after 2004 are covered under the defined contribution formula of the National Pension System; hence the government's pension liability on account of these employees will decline to 0.7% of GDP by 2050 from 2.2% of GDP currently. The problem, however, lies in the private sector.

CRISIL Research has built a best-case scenario where pension coverage expands such that 70% of the private-sector retirees by 2030 (63 million) will get a pension compared with just 8% (4.8 million) now. Even if this happens, and the government has to provide pension to only 30% of the old, in addition to retired government employees by 2030, its pension bill will rise by 120 basis points to 3.4% of GDP by 2030 from around 2.2% currently, assuming each pensioner gets Rs. 2,000 every month.

Under the worst-case scenario, if private-sector coverage stays chronically low at its current level of 8% even by 2030, the government will have to formulate a pension scheme to support the entire population of the old. This will raise the fiscal burden to as high as 4.1 % of GDP, assuming a monthly payout of Rs. 1,000 per pensioner - or half the amount in the best-case scenario. While all old citizens will receive pension through such a scheme, the amount each one gets will be significantly lower than in the best-case scenario because of the sheer number of dependents.

Adds Ms. Kudva: In either event, the fiscal burden of pension ranging from 3.4% to 4.1% of GDP in 2030 is high. In comparison, the central government today spends 3-3.4% of GDP on education and just over 1% of GDP on medical and public health, water supply and sanitation.

Therefore, the government will have to facilitate access to pension plans for a huge section of the private-sector workforce to avert fiscal stress, and it will have to complement this by incentivising retirement savings. India is not the only country set to witness a steep increase in old-age dependency. Indeed, the proportion of its old people will be less than those of several countries and also the world average in 2030. But the rise from where we stand today will be steep - hence the need to act fast. says Dharmakirti Joshi, Chief Economist, CRISIL.

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