Govt should construct a robust pension system

India’s current demographic phase, during which the share of working age to total population ratio is increasing, is projected to be followed by an old demographic profile before India becomes rich.

In constructing robust pension systems that can adjust to micro-economic shocks and demographic trends, two peculiarities need to be incorporated in design and implementation.

First, there is a long lead time needed to make changes in pension system.

Second, there is tyranny of small numbers. Seemingly minor changes in key variables, such as beneficiaries living one year longer than anticipated, could disproportionately impact on its financial viability.

The probable budget impacts on senior citizens arise from the acts of commission (i.e. what has been  proposed), and  of omission (i.e. what has not been addressed).

The Acts of Commission may be grouped as follows:
(i) Income tax:
Reduction in age from 65 years to 60 years for qualifying for senior citizen exemption limit for Income Tax.

Increase in the exemption limit from Rs2.4 lakh (which is higher than the standard exemption limit) to Rs2.5 lakh.

Creation of a category of Very Senior Citizens (i.e.  those above 80 years), for whom the exemption limit has been raised to Rs5 lakh.

These proposals will have positive short-term impact on household income of the affected elderly, but not necessarily for the elderly as a group.

This is because the actual number of personal income taxpayers in the country at around 35 million (7% of total labour force of about 500 million) is already quite low.

Increases in exemption levels benefit relatively higher income groups.  They, however, narrow the tax base and result in higher tax rates. If increased exemptions adversely impact fiscal consolidation, possible higher inflation and interest rates could adversely impact the population, including the elderly.

Symbolic increases in income tax exemption limits which increase fiscal risks, are thus not in the interest of the elderly, particularly those in the bottom two-thirds of the income group.

With rapid ageing, the share of GDP devoted to pension and health care needs will increase. The challenge is to create a policy environment for sustained high growth which is the most important macroeconomic variable for economic security of both the young and the old; and to ensure that the responsibilities for financing the higher share of GDP are distributed equitably and efficiently.

Intra-elderly distribution of pension benefits and burdens also need to be considered. Too large a benefit to one group of elderly (e.g. civil servants) could crowd out benefits for the rest of the elderly as the society would devote a relatively limited share of GDP to social security needs.

(ii) “Swavalamban” Scheme
The budget lowers the exit age for the Swavalamban Scheme to 50 years (currently 60 years). The co-contribution is to be extended to five years instead of three years. The projection is that about 2 million (currently 0.4 million) will join by March 2012.

No rationale for lowering the exit age is provided. With increasing longevity (an Indian at age 60 is expected to live on the average for 16 years if male, 18 years if female), exit age needs to be gradually increased, not decreased.

(iii)  Indira Gandhi National Old Age Pension Scheme (IGNOAPS)
The IGNOAPS provides budget financed pensions to below poverty line beneficiaries. The budget proposes to reduce the eligibility age to 60 (from 65) and increases Centre’s contribution to Rs500 per month (from 200) for those above 80 years.

The States are free to supplement the Centre’s contributions. As fiscal space, and delivery efficiency varies among states, the total pension amount, and the extent of errors of exclusion (i.e. those that should be included are not), and of inclusion (i.e. those that should not be included are nevertheless included) also varies across the states.

The method of identifying the poor, i.e. the beneficiaries, may need to be reviewed to minimise the two types of errors; and the transaction costs reduced.
(iv) The PFRDA (Pension Fund Regulatory and Development Authority) Bill.
The budget proposes to reintroduce the PFRDA Bill, which lapsed in 2010.

A pension regulator with formal authority could provide needed confidence and expertise for individuals to undertake long-term retirement savings using the New Pension Scheme (NPS).

It is hoped that the UPA government will exhibit requisite commitment for passing this Bill, and equipping the PFRDA to develop a robust pension system.

The acts of omission
The 2010-11 economic survey presents refreshing insights on policy principles based on sound economic reasoning, particularly in arguing that markets and inclusive growth are not inimical to each other.

These insights are, however, not sufficiently reflected in the UPA government’s social sector policies and schemes, including those impacting senior citizens.

The insistence on expanding rights, without corresponding supply increases in administrative capacities, and responsibilities represents poor mix for adopting these insights.

The petition to the Supreme Court by the former Union cabinet secretary TSR Subramaniam and 82 distinguished public servants has sought urgent reforms by the Centre and the State to improve the civil service quality.

This suggests that the executive branch has been negligent in improving quantity and quality of public services, even as their costs borne by the taxpayers continue to rise.

The Right to Service laws introduced by Bihar and  Madhya Pradesh are in the right direction as they spell out the responsibilities of the Civil Servants and political authorities for service provision.

The Central government agencies, such as the Employees’ Provident Fund Organization and the Employees’ State Insurance Corporation, could take the lead and consider adopting relevant provisions of these laws to instill service orientation in their organisation.

It is time that these organisations are required to justify the economic and social costs they impose on all the stakeholders, particularly the members.

Some of the design provisions of the NPS, such as mandating the purchase of annuity at age 60, need revisiting.

The challenges arising from India’s rapid ageing require a more comprehensive approach than relatively minor scheme-based changes contained in the budget. It is time to focus on constructing a robust pension system, whose different components are well integrated, and professionally and completely managed, with sound governance structures. 

The writer is a professor of public policy at the National University of Singapore and can be reached at mukul.asher@gmail.com. Views are personal.