INDIA: 85% of workers not covered by old age security schemes

India’s investors need to be smarter about securing future income

MUMBAI (The Indian Express), May 11, 2005:

Recent survey data from the Indian Retirement, Earnings and Savings database of households from the finance ministry — which this newspaper has been scrutinising — indicates many disturbing trends, says an editorial comment in THE INDIAN EXPRESS.

First, it shows that nearly 85 per cent of workers in the economy are not currently covered by an old age security scheme.

Other than government employees, who have a pension, another 4 per cent who have provident funds and a thin slice that has private pensions and savings plans, most of India’s workers would need to depend on their children in their old age.

But 60 per cent of them already live in nuclear families, and about 40 per cent are not even confident that their children will take care of them.

Moreover, even if they expect to live with their children, few are preparing for building up a nest egg so that they are able to take care of their own affairs.

The lack of an economy-wide old age security system means that people need to be putting together their own retirement nest.

Yet, the majority — 65 per cent — are not even thinking about it. And, further, even among those who are thinking about it, financial literacy is very poor.

Nearly 60 per cent are putting money in the most low return form of savings such as savings bank accounts. On the one hand, Indian investors shirk from taking financial risk but, on the other, the strategy of not saving for their old age, is very risky.

What can the government do?

* First, the role of the state lies in good regulation of the financial sector so that people feel safe in putting their money into financial assets. If one family loses money in a scam due to a badly regulated bank or a non-bank financial intermediary, it will scare 10 families away.

* Second, regulators such as IRDA, SEBI and the PFRDA, have developmental and education roles, which must be carried out responsibly to encourage people to look at different financial assets and make better choices.

* Third, the government should encourage competition so that people get better prices and services.

While it is easy to blame illiteracy for the lack of financial illiteracy, as the survey suggests, this is only part of the problem.

The state needs to take a far more active role in educating people about both the need and the means available for achieving security of income. http://www.indianexpress.com © 2005: Indian Express Newspapers (Bombay) Ltd.