BUSINESSWORLD SPECIAL REPORT: SOCIAL SECURITY - India AgeingWhile the nation is cheering the economic gravy train, spare a thought for the future of those who miss it.
Special Report by Vishal Krishna
KOLKATA (BusinessWorld Weekly), November 20-26, 2007:
The demographic news is encouraging, even very positive. India’s population will age over the coming 20 years, but the country will nevertheless be relatively youthful. Projections indicate that India’s over 60-years-old population will be 166 million, according to the United Nations; those elders will account for 11.5 per cent of the overall population; the country’s median age, then, will be just over 30; and the population support ratio or PSR - a ratio of the working age population (15-64 years) to retired people - will be almost 9:1, a level last witnessed in today’s more developed countries before World War II.The economic growth story also provides comfort; on the face of it, India’s economic growth rate can sustain and support an ageing population. Yes, consumption is currently on the rise, at 44 per cent of nominal GDP, but savings are expected to grow and are projected to be nearly 39 per cent of nominal GDP in 2025. "Young people are saving up," says Manika Premsingh, economist at Edelweiss Capital, a Mumbai-based securities firm. "There will be enough money that can be distributed to retirees if we create a social security system."
But is that enough to ensure that we can support an elderly population? At the moment, India has nothing like society-wide old-age pension coverage. Only about 11 per cent of India’s workforce participates in any guaranteed retirement income system. (An ‘emergency’ needs-based monthly stipend is available for people over 60, but this mechanism is not guaranteed to be available to all who apply and meet its hardship qualifications.) Although policy makers and academics have been discussing alternative paths to universal old-age income protection with some seriousness in recent years, no plans are on the national policy agenda.
Needed: Social SecurityLacking a comprehensive national retirement pension policy, our implicit strategy for meeting the ageing challenge, at least for now, is to grow our way through it. Like many unstated game plans, this is highly problematic. A sustained 5.5 per cent per capita growth rate - the rate at which Japan grew after World War II - for India over the next generation can hardly be taken for granted at the moment. And while India grows, the family, which presently provides support to the elderly, is likely to be threatened by individual career needs.
Generalised approaches to the issue are also fraught with risks. India has three distinct identities, and the needs of each pose different sets of challenges to policy makers and providers of financial products for social security. Poorest India describes the 350 million-400 million people who live on less than $1 (Rs 40) a day, notably in the Hindi belt, and among historically excluded groups such as scheduled castes and tribes. It also includes Muslims and women, young and old.
Developing India captures the India where average annual per capita income is just $630 (Rs 2,520). There are 500 million people who have their heads above water — but only just. They have enough to eat, somewhere to live and can send their children to school, but not much more. ‘Global’ India, by contrast, is riding the wave of annual growth rate of over 8 per cent since 2002; per capita incomes will pass $825 (Rs 3,300) by 2012. India will then become a ‘middle income country’.
Differences Under The SkinBy 2025, north India’s population would still be very young. Its projected median age would be just 26 — and the 65+ group would account for less than 6 per cent of total population. On the other hand, south India’s population structure in 2025 would bear unmistakable signs of ageing. There, median age would be about 34 (a level comparable to Europe’s in the late 1980s), and 9 per cent of the population would be 65 or older (about the same share as Japan’s in 1980).
But there will be an ‘ageing gap’ between north India and south India, with ageing by 2026 already having progressed considerably in a number of southern states. In each of India’s four southernmost states, median age would be over 35, and over 37 in both Kerala and Tamil Nadu. In these projections, Kerala and Tamil Nadu’s proportion of persons 65 and older both exceeded 10 per cent by 2025.
In the period since the 1991 economic crisis, we have averaged a highly respectable 4 per cent annual rate of per capita growth, and have become a presence in the global IT economy through enclaves in places such as Bangalore. But even Bangalore - like the rest of south India - will be part of what may soon be known as ‘old India’. While its labour force is relatively skilled, it is also older, and absolute supplies of available manpower will soon peak and begin to shrink. Other parts of India, by contrast, will have abundant and growing supplies of labour, but a disproportionate share of that manpower will be either entirely unschooled or only barely literate.
The Dependency IssueThe 60th round of the National Sample Survey Organisation (NSSO), conducted in 2004, says that 78 per cent of the population over the age of 60 is dependent on children to provide old age income support for their parents. Medical costs rise after the age of 60; indeed, medical expenses will grow further as people live longer and the average age reaches 70 years - 10 years longer than the average longevity today, according to the National Commission for Health. According to a report from the McArthur Foundation on the Indian medical infrastructure, 68 per cent of the household expenditure after the age of 60 was spent on medical costs. "Only 10 per
cent of Indians actually save for old age," says Ajay Bagga, CEO of Lotus Asset Management Company. "Rising medical costs leave very little for savings after crossing the working age."
Access to health in India has been less than desired due to poor governance, dysfunctional role of the State and underutilisation of health infrastructure, says the report. This is where pensions and other means of supporting old-age income become important in a country whose working population is ageing.
Urban India reflects this, too. According to the United Nations population report, India’s urban population will account for 37 per cent of the total in 2025. The situation in urban areas reflects on movement of the economy from the ideology- based past to the market-based bandwagon of the present. It is here that people in their mid-40s are in a state of flux. "The economy opened up in 1991," says Bagga.
"Most people in their 20s then had invested in traditional savings instruments such as fixed deposits, government bonds and state owned insurance policies. These policies, with inflation indexed in the present, do not offer good returns." But he mentions that in those days such instruments made sense as the economy was controlled and they offered better returns for life. However, it’s the people who are now in their 40s that will face the brunt of the change in the system, as they see no returns in policies sold to them in the early 1990s. They understand that they are only 10-15 years away from retiring, and they have to invest in policies that will charge them high premiums.
It’s About Survival If anything, growing old is harder on women than on men in rural India. All too often, they outlive their men in their lives, and have weak or no support structures when the men have passed on. "It is always the women who are in trouble when they age in the village," says 33-year-old Sridevi, a resident of Ananthagiri village in Andhra Pradesh. "Nobody knows how old some people are, as we have no birth certificates." That piece of paper matters, as only those who are considered old - or over 60 years - by the village panchayat get pensions, about Rs 200 a month. It trickles down from the state government through the mandal’s revenue officer to the gram panchayat secretary, who then distributes money to those registered as being above 60 years of age.
The National Sample Survey Organisation 2004 report says that 85 per cent of the women in rural areas fall below the poverty line once they stop working. About 63 per cent have assets in land. All of the 50 women that BW spoke to were between 40 and 60 years old, and in debt. Even those who did buy savings products withdrew it all the moment their spouses lost their jobs, which for farm labour, is a frequent occurrence.
Sridevi herself has a high school education, which gives her a voice in the village. She organises the farm workers and educates them about saving for the future. To most of the women in her village, personal savings are an alien idea; savings only mean not having to borrow to pay for a daughter’s wedding or paying for a son’s higher education. Usually, their families live on a negative savings balance - or on debt - every month. "As cold as the truth is, their lives are very difficult," says Sridevi. "Most bought insurance and began paying premiums because they receive an assured sum that can keep their lives in peace for a year or two after the man’s
death." For them there are no sunset years - just sunsets that mark having survived another day.
Can Financial Markets Help?Insurance providers and mutual funds - the main foundations of long-term savings in developed economies - are yet to sort out plans for distribution networks that would penetrate the rural household. This penetration needs setting up of distribution offices and maintaining a sales team in every village, which is expensive for companies. "It is better to use current systems such as post offices to distribute old age incomes," says Premsingh. With no distribution system in place, it is difficult to induce the poor to invest in policies or products that offer them a social security net when they age.
But for the government and corporate India, creating a distribution network for pension and savings flow is a difficult task because data collection and record keeping can be arduous. The poor in these regions are known for not paying premiums regularly and are only accessible through a sales force if it is employed from the village itself. But when the individual who has sold them a policy, connected to them personally, is cut out of the chain, they often discontinue the policy. Some state governments provide pension coverage for the rural poor. "Data keeping of those who are above the age of 60 is a challenge, as most of them do not have their birth certificates," says D. Babu, sarpanch of Ananthagiri village in Nalgonda district in Andhra Pradesh. "Even the money paid for the old in villages is very small, about Rs 200 a month."
Despite the difficulties, the life insurance market has grown from $5 billion (Rs 20,000 crore) just a couple of years ago to $15 billion (Rs 60,000 crore) in 2006. This is just a tiny amount, when compared to the large market in India. "It is the trickledown of pension funds or any form of savings that matters," says Khushroo B. Panthak of Walker Chandiok and Co., a consulting firm. "It is always the distribution system that has become a matter of debate, as this will have to service a large social security network."
Insurance companies are using women for the main thrust of distribution in rural areas. "As farm incomes grow, we will have products with higher premiums that will be endowment-based," says Trevor Bull, managing director of Tata-AIG Life, a private sector insurance firm. "Thirty-one per cent of our business is micro insurance and 80 per cent of the buyers are between the ages of 18 and 60."
The Lord Provides
TT is a form of divine intervention. After much thinking about the right distribution strategy, companies have turned to churches to help sell insurance policies and with great success. Over the past five years, about 18-20 per cent of all policies sold in villages and rural areas have been through this channel.
In Andhra Pradesh, non-governmental organisations (NGOs) linked to local parishes sell micro-insurance - coverage is for small amounts up to Rs 25,000. In the villages of Khammam district, excluded communities such as scheduled castes and scheduled tribes are a prime target audience. Sanjit Sinha, managing director of Micro-Credit Ratings International, a ratings agency for micro-finance and micro-insurance firms, is quick to point out that they are not agents in the traditional sense of the term. "They are facilitators who help insurers find their target audience," he says. Churches are precluded from taking commissions. Instead, commissions are paid to the NGOs, which do not suffer from such restrictions.
This sense of community allows insurers to leverage the personal touch that is so necessary in successfully selling savings products to what can be a difficult market. "We have no lapses in policies because there is follow-up on renewing premiums," says a director of an insurance company who wished to remain anonymous. The NGOs also run the schools in many of these villages, and maintain close personal relationships with parents, which gives them a further advantage when they interact during parent-teacher meetings, for example. If the government has its post offices and banks to sell insurance in rural markets, private insurers have the Lord on their side.
What Else Can Be Done?
Economists say that as India’s savings grow, they should be invested in the stockmarket. The market has always paid off in the long run, say industry flag bearers. They also suggest that the government could use the post office effectively to get rural people to save and finally use it to distribute old-age income at the same time. But the creation of a mechanism to take savings and later prepare the system to pay pensions is still on the drawing board at the policy level.
While arguments about whether the market performs well or not continue, there is little doubt that serious pension reform is necessary, within the wider context of social security. "The government has outlined its intention to move towards private pension fund management soon; it is the creation of the distribution network with comprehensive individual records that will allow pensions to flow into every household in India," says Joydeep Datta, chief investment officer of Tata-AIG Life.
At first glance, the obvious policy avenue for coping with population ageing might appear to be strengthening - and broadening the coverage of - the national pension arrangements. Certainly, there is plenty of room for improvement here: even a relatively small measure of redistribution within the workings of a nationwide pension system could provide a measure of protection for the most vulnerable of the elderly (a group that will be disproportionately rural, agrarian and female).
In actuality, however, the potential of pension reform may offer less opportunity than would first seem to exist, some experts say. Our polity betrays scant interest (on the part of either policymakers or voters) in protecting the health and well being of economically productive citizens, much less social dependents. By the same token, the idea of extending pension coverage to the countryside and the slums is not unpopular: it simply is well beyond the realm of serious policy discussion.
Yes, there is interest among policy makers to extend the nation’s pension coverage to poorer rural regions, but action has been precluded by the immense obstacle of the vast existing unfunded pension liabilities for comparatively well-off urban and state employees. However separate those two questions may appear intellectually, in practical terms they are inseparably linked, and the government’s inability to deal with the latter means it cannot make progress on the former.
Alvin Toffler wrote a bestseller about it in talking of the story of another generation: Future Shock, or the disorientation that a society goes through when events move faster than our ability to adapt to its effects. Without social security, it might be ours, too.
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Businessworld Issue November 20-26, 2007
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