INDIA: Seniors need Social Security, says Expert

N. S. Kannan, Executive Director, ICICI Prudential Life Insurance, has written the following comment, as government finalises plans for the Union Budget 2007: MUMBAI (MoneyControl.com), February 13, 2007: India is fortunate to have one of the youngest, most vibrant populations in the world. It is a country where old and new economies merge, throwing up a myriad of opportunities, and resulting in sustained GDP growth of 8 to 9% per annum. This is our biggest strength as we rightfully claim our position as an economic superpower. And one of our biggest challenges is to ensure that we do not erode it by implementing systems and policies that would strike at the heart of our competitive advantage: our people. We must learn from other countries and adopt policies that will ensure long-term social equity and productivity. In this respect, there are two major needs: securing a steady income for our retirees who have contributed to the economy for many working years; and ensuring that our young population remains healthy and continues to operate at maximum productivity. First, let's address the need for old age income security. In India, there is no social security system, and only those who are in government services - about 11% of the organized workforce - can be assured of a pension for their old age. The rest must save during their working years to ensure that they have an adequate income to cover their lifestyle and medical expenses in their old age. Only this can secure against financial destitution in old age and ensure that our elders can live a dignified and enjoyable retired life. To ensure that people save for their old age, we need fiscal policies that serve to incentivise this, i.e. differentiate between short-term and long-term investments and offer benefits that urge people to stay invested. Currently, long-term instruments like PF (provident fund), pension and life insurance plans, receive the same tax treatment as the shorter term mutual funds ELSS and NSC and hence drive customers adopt a short-term approach. Moreover, those who save more than the Rs 1,00,000 limit are effectively taxed at both the entry and exit stages, resulting in a situation, which encourages expenditure rather than savings. Have a separate tax exemption limit specifically for pension plans Globally, countries have addressed the problems of old age security in several different ways. The most effective has proven to be a system with a separate tax exemption limit specifically for pension plans, as this demarcates one's retirement savings and ensures against the temptation to withdraw for short-term needs. Further, the limit should be adequate - possibly about Rs 50,000 per annum - to build a sizeable retirement kitty, taking into account inflation, progressively increasing longevity over generations and the need for higher spends on medical requirements in old age. Which brings us to the second concern: health security. Public spends on health in India are just about 20%, the rest being borne by individuals, of which less than 1% have insurance. Every year, hundreds of thousands of people sell their assets or take hefty loans to avail of medical treatment. Faced with the rising costs of medical treatment, often individuals compromise on the quality of treatment. All these factors result in sub-standard health of the nation over the long-term, and will directly impact economic output and growth. Again, different countries have adopted varying systems to address the health needs of its citizens, ranging from complete cover at one end of the spectrum, to incentives to save for health requirements at the other. Many of these, like in the UK, have created massive, lasting burdens on the government and created a vicious circle that is painful to break free from. Fortunately, we in India do not have the legacy of these problems and can begin our systems afresh. The need then, is to ensure that each person adequately provides for medical contingencies that may arise. For some time now, insurance has been acknowledged as one of the most efficient means to meet and manage health spends. It ensures wide coverage for a relatively lower sum, and depending on its structure, can be customized to a great extent. In this light, the government should promote insurance so as to avoid the burden falling on the individuals. Increase tax deduction for health insurance Our current tax structure allows a tax deduction of Rs 10,000 under section 80D for payments towards health insurance plans (Rs 15,000 for senior citizens). However, with the rapidly rising costs for medical expenses, the amount is outdated and needs to be significantly increased. Further, with age come increasing medical expenses, which arise from higher incidence of critical illnesses and greater need for long-term medical care to manage chronic illnesses. Hence, there is a need to incentivise people to save for their health needs in their younger years, which will fund them in the older years. A substantial upward revision under section 80D will therefore help one not only secure their health during their working years, but their retired ones as well.