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The population of the elderly in India is expected to touch 78 million by 2016 and 116 million by 2026, with average longevity stretching beyond 75 years. This means, the average Indian worker needs to provide for at least 15 years of life post-retirement.

As per Census-2001, the country’s total workforce stood at 403 million, including 311 million rural and 92 million urban workers. Non-agricultural workers numbered 168 million, including 16 million industrial workers, while the 235 agriculture related workers included 128 million cultivators.

The social security coverage of most of the agricultural and non-industrial workers is inadequate.

The government pension system covers only those employed by the Central and State governments. Mandatory schemes like the Employees Provident Fund and Employees Pension Scheme (EPF and EPS) cover only 43 million with cumulative assets of Rs 2.16 lakh crore as of March 2006 (annual report of EPFO), pegging their aggregate coverage at less than 15% of the working population.

Around one-eighth of the world’s elderly live in India. Most of them are not covered by a pension system, and have to rely on family-based arrangements or their own earnings. However, the joint family system is progressively disintegrating, giving way to nuclear families. This makes things more difficult for the elderly.

The need for policy planners to focus on this important area, therefore, was never more seriously felt.

The traditional methods of old age income security are not able to cope with the trends of increased life span and spiralling medical expenses. Hence, there is a pressing need to re-examine the existing formal and informal systems available to tackle the challenge of the ‘Age Quake’.

The government can provide larger tax advantages to people in their fifties, as compared with the younger groups, in pension deductions. From the point of view of the pension funds, the younger cohorts are more attractive since the early money is with them for a longer period of time. But, from the point of view of facilitating the transition from a community and family-dependent system to one based on deposits and funds, it is needed to give a big boost to the savings of persons in their fifties.

The ministry, for instance, can think of giving tax exemption up to Rs 5 lakh for pension savings to this group, rather than continue with a fixed deduction. May be this tax structure can be re-worked after a decade.

The finance minister can also create a National Fund for the Aged (NFA) - similar to the Prime Minister’s Relief Fund. The NFA should be used to meet medical expenses of the aged and the needy by tying up with hospitals. Contributions to this fund should offer tax exemption to corporates and tax exemption and membership to individuals. It can be a replica of the successful Yashaswini scheme in Karnataka, but covering even the middle class.

Pension funds can be encouraged to take single premium in the form of gold since we are one of the largest savers in gold ornaments in the world. For this, suitable tax exemption can be given by the government. This would put to productive use the stock of gold available with the middle class, the more so given the disinclination of younger girls to wear gold ornaments.

Property holdings are another asset class that can be put to good use. Data provided by the National Sample Survey (59th round) on household assets and liabilities provide clues to the situation. An analysis of data by MPCE (household monthly per capita expenditure) shows that middle-class households (urban) hold up to 67% of their wealth in the form of housing equity. In the rural areas, about 63% of the elderly had some property, and in the urban areas, about 58%.

This over-investment in housing is against the textbook type investment in a diversified portfolio. Most households tend to over-invest in housing equity because it is both a durable (investment) as well as consumption good (shelter needs that have an outflow of imputed rent).

Reverse mortgages were designed as a product for elderly homeowners, who are ‘house-rich’ but ‘cash-poor’, allowing them to liquidate a portion or the whole of their home equity over a period of time to create a regular stream of income.

The finance minister should give a huge boost to reverse mortgage by completely exempting the income stream from taxation and also ironing out other legal issues. If some enterprising pension funds want to use gold for reverse mortgage, that should also be treated similarly.

People above 60 go to vote religiously compared with those in the twenties. Hence, the finance minister’s actions will translate into votes.

Last but not the least, the finance minister should accept the recent scientific findings that professors become senile at a much later age and provide enough funds to the HRD ministry so that the retirement age of teachers across the board can be increased to 70.

vaidya@iimb.ernet.in.

Views are personal.