Need to reform India’s Pensions System

In Context

• Recently, the Global Pension Index ranked India’s pension system at 41 out of the 44 countries.

More about the Index

• About:
  • There is an index for ranking the pension systems across the world. It is called the Mercer CFA Institute Global Pension Index.
• What does this index track?
  • The index report admits that it is neither easy nor straightforward to compare pension systems across the world.
    • There are differences in population profile and requirements, economic growths, government revenues, regulatory maturity and the development of private markets.
  • The index ranks countries on three criteria:
    • Adequacy: What benefits are future retirees likely to receive?
    • Sustainability: Can the existing systems continue to deliver, notwithstanding the demographic and financial challenges?
    • Integrity: Are the private pension plans regulated in a manner that encourages long-term community confidence?
• India’s rank:
  • The 2022 edition of this index ranks India’s pension system at 41 out of the 44 countries it considers. 
  • Consistently low:
    • That’s a low rank but it is also important to note that India has consistently ranked low on this index even when only 16 countries were analysed in 2011.

More about the pension

• A pension provides people with a monthly income when they are no longer earning.
• Need for Pension:
  • One is not as productive in the old age as in youth.
  • The rise of nuclear family –Migration of younger earning members.
  • Rise in cost of living
  • Increased longevity
  • Assured monthly income ensures dignified life in old age.
  • Global Data suggestions:
    • According to the World Economic Forum: “For the first time in human history, people aged 65 and over outnumber children aged five or younger”. 
      • And while this stress may be less for a country such as India, which has a relatively younger population profile, there is such a thing as longevity risk.
    • Longevity risk points to a scenario where rising life expectancy could result in pension and insurance companies needing more cash because people are living for longer than anticipated.
• Highlights about the gross inadequacy of India’s pension architecture:
  • At least 85 per cent current workers are not members of any pension scheme, and in their old age likely to remain uncovered or draw only social pension
  • Of all elderly, 57 per cent receive no income support from public expenditure, and 26 per cent collect social pension as part of poverty alleviation
  • 11.4 per cent of the elderly draw defined benefit as government ex-workers (or their survivors), cornering 62 per cent of system expense
  • The system for old age income support entailed 11.5 per cent of public expenditure, and sub-national governments bear more than 60 per cent
  • Contributory program funds invested in government paper soak up 40 per cent of all interest payment of sub-national governments

Way ahead

• India’s pensions system is in a dire need of a reform and merely fluctuating between OPS and NPS is not a reform. 
• Reforming the pension system will be both good politics and good economics.

Source: IE