28 Keynote Address Mukul Asher

Preparing for Ageing India

Mukul G AsherMukul G Asher

Professor of Public Policy

Lee Kuan Yew School of Public Policy

National University of Singapore

E-mail: [email protected]

To be presented at Sixth Annual International Conference on Public Policy and Management, IIM Bangalore, December 28-30 , 2011 1

Organization

• Introduction

• Trends in India’s Ageing in a Global Perspective

• Fiscal and Labor Market Implications

• India’s Social Security System: Characteristics and

Limitations.

• The Way Forward

2

Introduction/1

• Global Population ageing represents an unprecedented

phenomenon in human history. This is due to a combination of

declining fertility rates and improved longevity.

• U.N. projections suggest that by 2050, the number of older persons

in the world will exceed the number of young for the first time in

history. For India, this is projected to occur slightly later, by 2065.history. For India, this is projected to occur slightly later, by 2065.

• Preparing for ageing is therefore a global issue.

• It is in the above context that I welcome this opportunity to discuss

issues focusing on preparing for ageing India.

• The discussion however is necessarily selective, primarily focusing

on the overall context in which India will need to prepare for

approaching ageing society, particularly with respect to financing of

old age.

3

Introduction/2

• There is a strong perception in India that it is in a demographically advantageous stage which is reflected in rising working age population to total population ratio; and a relatively low median age of population (See figure 1).

• This perception is valid for the current period, but a more nuanced forward looking analysis reveals that there is an urgent need to lay solid foundations for an ageing India which will be a reality within next three foundations for an ageing India which will be a reality within next three decades.

This will have wide ramifications not just in terms of pensions and healthcare costs, but in economic, social, business, and political spheres.

• Thus, a recent international study, published in the proceedings of National Academy of Sciences(PNAS) found that for productive aging, better education, nutrition and living standards in the youth are needed.

4

Figure 1: Population Aged 15-59 for Asia-Pacific Economies -1950-

2050

5

Introduction/3

• Preparations for ageing thus involve wide range of policies

and measures.

• Differing fertility and longevity trends among different regions

of the country(broadly southern and Western regions of the country(broadly southern and Western regions

exhibiting relatively lower fertility and higher longevity than

Northern and Eastern regions) will complicate not just the

analysis of the ramifications, but also require more nuanced,

decentralized economic, social and political responses.

• The 2008 global economic crisis and its aftermath will also

need to be taken into account in preparing for ageing India.

6

Introduction/4

• The 2008 global economic crisis has made external environment

more challenging.

– Reduced medium term growth rate, which is the single most important

macro economic variable impacting on the economic security of both

the young and the old.

– Adversely impacted the pace and quality of economically productive – Adversely impacted the pace and quality of economically productive

jobs and livelihoods creations.

– Potentially raised the cost of debt financing.

– Potentially lowered remittance flows.

– Made obtaining high investment returns on pension assets more

difficult.

– An aggressive fiscal and monetary stimulation by major economies

could lead to inflation, constraining fiscal space, and raising fiscal and

debt sustainability concerns.

7

Trends in India’s Ageing in a

Global Perspective/1 • This section provides an overview of trends in India’s ageing

in a Global perspective.

• Table1A-1C provide selected demographic indicators for the

world, Asia, and India and other countries for 2010-2030.world, Asia, and India and other countries for 2010-2030.

• Asia will experience faster ageing than the rest of the world.

• In 2030, it will contain 60 percent of the global population

above 60 years and 51 percent above 80 years. These

proportions are much higher than the corresponding figures

for 2010, 54.5 percent and 44.7 percent respectively.

8


Global Perspective/2• India’s share in Global population above 60 years will rise

from 12 percent in 2010 to 13.4 percent in 2030. the

corresponding increase in population aged 80 or over will be

0.8 percent to 0.9 percent.

• In 2030, there will be 185 million Indians above 60 years of

age. This is a large number, and any design or other errors in

structuring policies for them could prove to be very costly.

• India’s life expectancy at age 60 (which is the relevant figure

for analyzing ageing) was 16. 9 years during 2005-2010 but is

projected to increase to 17.3 years by 2015-2020.(these data

are based on UN sources).thus, each person will have to be

supported for a longer period. 9


Global Perspective/3• As health expenditure increase disproportionately with

age, trends in longevity are of particular relevance when

assessing financial sustainability of financing old age.

• For instance, data from OECD countries suggest that

health expenditure for an individual aged above 65 is 4

times that of an individual aged 15-64; and 8 times

higher for the old-old age group (OECD, 2006).

10


Global Perspective/4• Takayama’s (2010) estimate of health expenditure being

4.8 times higher for an individual aged above 65, using

disaggregated age-specific health expenditure data from

Japan, corroborates the OECD findings.

• Age related pension and health expenditure will rise for

the country, and this will have to be shared through

public intermediation, and community, family and

individual sources. It is in this context that fiscal

capacities and efficiency of public delivery system

become of crucial importance

11

CountryTotal Population

(million)

Population aged 60

or over (million)

Population aged 80

or over (million)

Year 2010 2030 2010 2030 2010 2030

World 6,909 8,309 759.1 (11.0) 1370.4 (16.5) 105.6 (1.5) 194.2 (2.3)

Asia 4,167 4,917 413.6 (9.9) 821.2 (16.7) 47.3 (1.1) 99.2 (2.0)

Asia-Pacific Countries

Australia 22 26 4.2 (19.5) 6.8 (26.5) 0.8 (3.9) 1.5 (6.0)

Table 1A: Asia-Pacific Countries: Selected Demographic Indicators

Trends in India’s Ageing in a Global

Perspective /5

12

Australia 22 26 4.2 (19.5) 6.8 (26.5) 0.8 (3.9) 1.5 (6.0)

Brunei 0 1 0.0 (5.8) 0.1 (13.5) 0.0 (0.5) 0.0 (1.2)

China 1,354 1,462 166.5 (12.3) 342.3 (23.4) 19.3 (1.4) 40.9 (2.8)

India 1,214 1,485 91.7 (7.5) 184.6 (12.4) 8.1 (0.7) 18.0 (1.2)

Indonesia 233 271 20.8 (8.9) 43.4 (16.0) 1.8 (0.8) 4.2 (1.5)

Japan 127 117 38.7 (30.5) 44.5 (37.9) 8.1 (6.3) 15.1 (12.9)

Malaysia 28 35 2.2 (7.8) 5.3 (15.0) 0.2 (0.7) 0.6 (1.6)

New Zealand 4 5 0.8 (18.2) 1.3 (26.3) 0.2 (3.5) 0.3 (5.4)

Papua New Guinea 7 10 0.3 (4.2) 0.7 (7.3) 0.0 (0.2) 0.0 (0.5)

Philippines 94 124 6.2 (6.7) 14.1 (11.3) 0.5 (0.5) 1.3 (1.1)

Republic of Korea 49 49 7.6 (15.6) 15.3 (31.1) 1.0 (2.0) 2.5 (5.1)

Singapore 5 5 0.8 (16.0) 1.9 (35.6) 0.1 (2.0) 0.3 (5.9)

Thailand 68 73 7.9 (11.5) 15.8 (21.6) 0.8 (1.2) 1.6 (2.2)

Viet Nam 89 105 7.8 (8.7) 19.2 (18.2) 1.1 (1.3) 1.9 (1.8)Source: Population Division of the Department of Economic and Social Affairs of the United Nations

Secretariat, World Population Prospects: The 2008 Revision, http://esa.un.org/unpp

Note: Numbers in parentheses is the percentage of total population above 60 and 80

Country Total Fertility Rate Life Expectancy at Birth Median Age

2010-2015 2025-2030 2010 2030 2010 2030

World 2.49 2.21 68.9 72.1 29.1 34.2

Asia 2.26 2.01 70.3 73.6 29.0 35.2


Australia 1.85 1.85 82.2 84.1 37.8 41.2

Table 1B: Fertility Rate, Life Expectancy and Median Age in Asia-Pacific

Countries

Trends in India’s Ageing in a Global Perspective/6

13

Australia 1.85 1.85 82.2 84.1 37.8 41.2

Brunei 1.95 1.85 77.7 79.1 27.8 33.7

China 1.79 1.85 74.0 76.6 34.2 41.1

India 2.52 1.96 65.2 69.4 25.0 31.7

Indonesia 2.02 1.85 72.2 75.7 28.2 35.4

Japan 1.27 1.4 83.7 85.3 44.7 52.2

Malaysia 2.35 1.87 75.2 77.5 26.3 33.2

New Zealand 2.02 1.85 81.0 83.0 36.6 40.2

Papua New Guinea 3.77 2.8 62.3 66.7 20.0 24.6

Philippines 2.85 2.35 72.9 75.8 23.2 29.0

Republic of Korea 1.26 1.39 80.0 81.7 37.9 47.6

Singapore 1.29 1.44 81.0 82.6 40.6 48.4

Thailand 1.85 1.85 69.9 73.5 33.2 38.8

Viet Nam 1.95 1.85 75.4 78.0 28.5 36.7

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World

Population Prospects: The 2008 Revision, http://esa.un.org/unpp

Note: The average number of children a hypothetical cohort of women would have at the end of their reproductive period if they

were subject during their whole lives to the fertility rates of a given period and if they were not subject to mortality. It is

expressed as children per woman.

Country Old Age Dependency Ratio

2010 2030

World 12 (8.3) 18 (5.6)

Asia 10 (10.0) 17 (5.9)


Australia 21 (4.8) 34 (2.9)

Brunei 5 (20.0) 13 (7.7)

Table 1C: Trends in Old-Age Dependency Ratios in Asia-Pacific Countries


Perspective/7

14

Brunei 5 (20.0) 13 (7.7)

China 11 (9.1) 24 (4.2)

India 8 (12.5) 12 (8.3)

Indonesia 9 (11.1) 15 (6.7)

Japan 35 (2.9) 53 (1.9)

Malaysia 7 (14.3) 15 (6.7)

New Zealand 19 (5.3) 33 (3.0)

Papua New Guinea 4 (25.0) 7 (14.3)

Philippines 7 (14.3) 12 (8.3)

Republic of Korea 15 (6.7) 36 (2.8)

Singapore 14 (7.1) 46 (2.2)

Thailand 11 (9.1) 23 (4.3)

Viet Nam 9 (11.1) 18 (5.6)Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects:

The 2008 Revision, http://esa.un.org/unpp

Note: The old-age dependency ratio is the ratio of the population aged 65 years or over to the population aged 15-64. All ratios

are presented as number of dependants per 100 persons of working age (15-64).

Numbers in parentheses refers to persons between ages 15-64 which could potentially support those above 65; calculated as

inverse of the old age dependency ratio.


Perspective/8

• Figures 2-5 provide a century of demographic transition

in India, China and US.

• That three countries which are very different are

projected to exhibit broadly similar population pyramid by projected to exhibit broadly similar population pyramid by

2050 reflects global ageing phenomenon.

15


Global Perspective/9

India, 1950 India, 2010

India will Age rapidly while still being a middle income country

Figure 2: India’s changing population age cohorts

16

India, 2050

Source: Bloom, 2011.


Perspective/10India will Age rapidly while still being a middle income country

Figure 3: India’s changing population age cohorts

17


Perspective/11 Figure 4: Demographic Trends and Projections – China

Source: Barr and Diamond, 2008.

18

Figure 5: Demographic Trends and Projections – U.S.


Perspective/12

Source: Barr and Diamond, 2008.

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Fiscal and Labor Market Implications/1

These imperatives will impact in the following ways:

•As noted, the current global environment is harsh on those countries

whose fiscal management is perceived to be both in accordance with

macro economic sustainability. This is exemplified by the current

developments in the Euro-zone, where sovereign risk for Greece , Portugal,

Spain, and perhaps Italy is inordinately high, endangering the future of

Euro.Euro.

•Given that India's combined fiscal deficit exceeds 10 percent of GDP and

its internal debt is quite high(general government debt was estimated to be

73 percent of GDP in 2009-10,when internationally above 60 percent is

regarded as a matter of concern) finding fiscal resources to meet the needs

of the ageing society will be a huge challenge. Rising interest rates, and

increasing risk perceptions of India globally pose additional challenges.

•The individuals and households will need to assume greater responsibility

for financing their old age, even as their tax burdens will rise substantially.

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•The individuals are also affected by the overall policy

environment, including labor laws and practices, which

are not conducive to generation of productive

livelihoods with opportunities to generate sustainable

higher incomes by providing skills which are in demand

in the dynamic and changing market place.in the dynamic and changing market place.

•Thus, between 2004-05 and 2009-10 the economy

generated only 2.6 million jobs (against the target of

over 50 million jobs) at the time when number of

livelihood seekers is rising rapidly due to the

demographic phase in which the share of working age

population to total population is increasing (Table 2).

21


Table 2: The Changing profile of the Indian Workforce

Figure in brackets are percentages

Source: http://epaper.livemint.com/ArticleText.aspx?article=28_06_2011_001_011&kword=&mode=1

Accessed on 30 June , 2011. NSSO Data

22

•The citizens therefore, have strong self interest to

demand from the policy makers, a better policy

environment and labor laws which are more

conducive to perusing flexible careers and


livelihoods, and to net formation of businesses.

•The stable long term employer-employee

relationship is increasingly not a dominant norm,

and the young will therefore need to be adaptable

and flexible in perusing their livelihoods.

23

Figure 6 : India’s Social

Security System

India’s Social Security System:

Characteristics and Limitations/1

Since January 1, 2004, the central government Civil Servants shifted to DC method for pensions, called the NPS.

All but three States and Union Territories have since adopted the NPS. The NPS now stand for New pension System. In 2010, co-

contributory ‘Swabalamban’ Scheme on a voluntary basis was introduced for those in the unorganized sector

Source: Author

24



• Key characteristics and limitations may be summarized

as follows:

– Lack of systemic prospective integrating different components of

the system.

– Lack of professionalism among the provident fund and pension

fund institutions. Outdated provident and pension fund laws and

regulations, and civil service employment contract designed for

a different era, are contributing to the lack of professionalism.

– Lack of sufficient level of pension, financial and broader

economic literacy, reflected in poor design, inefficient delivery

systems, weak learning curve effects for relevant provident and

pension fund organizations.

– Insufficient focus on fundamentals of generating and sustaining

high growth.25


Characteristics and Limitations/3Lack of Professionalism and the EPFO:

– Unusual in combining both DC and DB schemes

– Set up in 1952 as a mandatory scheme for private sector

employees. As at March 31st 2009, it had staff strength of 19,500,

rather large by international standards.

– As at 31st March 2009, The EPFO covered only 0.57 million

establishments (roughly same as Malaysia which has a population

of 25 million); its total membership was 47 million for the EPF, and

45 million for the EPS.

– The actual contributing members have not been provided but they

are believed to be around half of the total, (4.7% of labor force).

This is indeed quite a low average after nearly 60 years of

operation. Combined contribution rate: 25.7% of wages, rather on

the high side. There are proposals to increase it further, which could

adversely impact job creation in the formal sector.

26



• EPFO is among the largest non banking-financial institutions

(NBFIs) with assets of over INR 3,488 billion in 2009, equivalent to

6.2 per cent of India’s 2009 GDP.

• Its investment portfolio is in domestic debt instruments, primarily • Its investment portfolio is in domestic debt instruments, primarily

public sector debt, it therefore has no equity exposure, which makes

its portfolio risky due to lack of diversification, and less able to earn

returns for its members.

• As at 31st March 2009, the Provident Fund arrears were nearly Rs

3000 crore. , which is about 10 percent of the contributions received.

This suggests poor collection capabilities.

27

• There is a large actuarial deficit in the EPS. The recent actuarial

reports of the EPS, which have not been made public (but should

be), suggest that the deficit is in the region of INR. 500 billion, and

this is expected to rise significantly.



• As a result, ad- hoc changes are being introduced in the DB

scheme, such as the recent decision to end the commutation of

pensions (which permits lump sum withdrawal of future pension

benefits, subject to a limit). These however have inconvenienced the

members.

28



• Key challenge for the EPFO-

to provide quality of service and retirement income security

commensurate with the costs imposed on the economy.

- The EPFO should aim to become professional world-class service provider, regulated by a pension regulator. Its role as a service provider should be separated from its role as a regulator of exempt funds.

- Politicization of the EPFO will need to be reversed.

- Can the transformation of the EPFO be accomplished?

29



• Evidence is mixed. Essentially, newer developments in the pension

sector (the NPS, private market players extending their role, more

demanding membership, etc.) and broader changes in the economy

are impacting EPFO’s monopoly position, and demanding greater

accountability and transparency.accountability and transparency.

• Giving EPFO members a choice for contributing to NPS will improve

contestability and provide information to the policy makers about the

retirement benefits and quality of services. Only the EPF scheme is

compatible with NPS. Therefore the EPS Scheme cannot be

subjected to such a choice

30



– But EPFO’s:• governance structure (45 member Board, with Minister of Labor as chairman;

• limited access to outside expertise)

• poor design of its schemes; • poor design of its schemes;

• lack of appropriate organizational and individual incentives;

• outdated budgetary and record-keeping systems due to modest IT systems and absence of apperoperiate investments in human resources suggest that reforming it will be a huge challenge.

31



• The outcome of the EPFO policies and practices is reflected in the balances of the members shown in Table 3.

• The balances of the members is not only low, but 16% members accounted for 84% of the balances in 2004.members accounted for 84% of the balances in 2004.

• Such data, which should be routinely made available, is not by the EPFO, so only one-off 2004 data are available.

• This suggests that any interest subsidy to EPFO members accrues to those in the higher wage groups.

32

Table 3 : India: Members’ Balances in the EPF, 2004

Balance

(in Rs.)

No. of

members

% of total

members

% of total

accumulation

Average

Balance (in Rs.)

Up to 20,000 293.4 lakh 84.58 16.98 3133

20,000 - 49,999 28.77 lakh 8.30 21.52 40,468

50,000 - 99,000 12.77 lakh 3.68 16.67 70,663



1 lakh – 1.99 lakh 7.91 lakh 2.28 20.25 1,38,414

2 lakh – 2.99 lakh 2.33 lakh 0.67 10.37 2,40,616

3 lakh – 3.99 lakh 82,629 0.24 5.23 3,41,959

4 lakh – 4.99 lakh 34,593 0.10 2.83 4,42,575

5 lakh – 9.99 lakh 36,297 0.10 4.29 6,40,229

10 lakh – 24.99 lakh 5973 0.02 1.45 13,16,782

25 lakh – 49.99 lakh 5973 0.0001 0.31 25,06,620

Above 50 lakh 86 0.00001 0.90 54,48,660

Source: EPFONote: 1 lakh = 0.1 million

33

•Figure 6 provides nominal and real rates of dividends declared by the EPFO for the year 1990-91 to 2008-09 period.

•The nominal rate is relatively stable but the real rate has fluctuated considerably, and as exhibited downward trend since 2001-02.

•EPFO’s zero allocation for equities as an asset class; and its practice since 1952 to deliberate on the dividends to be paid before the financial year is over reflect its inability to adjust to India’s new economic policies and to

India’s Social Security System: Characteristics

and Limitations/11

34

1952 to deliberate on the dividends to be paid before the financial year is over reflect its inability to adjust to India’s new economic policies and to international best practices.

•The zero allocation to equities has given undue prominence to the role of the foreign financial institutions(FII) in India’s stock market, arguably increasing volatility.

•Members would have benefitted considerably if the EPFO had allocated part of its funds (INR 3,488 billion in 2009) to purchasing shares in the state enterprises which have been divested and listed on the stock exchange. This once again shows lack of professionalism of the EPFO management.



Figure 7

35

Source: Calculated by the author based on EPFO various years; RBI Various Years.



– Low coverage of the population and the type of risks covered.

Low coverage of the EPFO schemes has been noted. Even if all

the contributory and civil service schemes are considered, the

total coverage is unlikely to exceed one-fifth of the labor force.

The coverage among the elderly is even lower.

– Even the OAP, where center and the state sharing cost – Even the OAP, where center and the state sharing cost

coverage no more than 25 percent of the eligible group, with

wide variations across country. the benefit levels are also quite

low, though they have been raised recently.

– Lack of uniformity in pension protection among different groups,

with civil servants receiving disproportionate share of India’s

resources devoted for pensions.

36



– Thus, pension cost of India’s 22 million civil servants

constituting around 4.6 percent of the labor force are around

1.6 percent of GDP and this will approach 2 percent of GDP in

spite of the introduction of the New (now National) Pension

Scheme (NPS) for civil servants in 2004.

– Cash accounting systems in government grossly understate the

pension and healthcare benefits which have already accrued.

– There are also no assets set aside to meet government

provident fund and pension and health care liabilities in an

orderly manner.

– The NPS shifts the civil service pension systems from non-

contributory Defined Benefits (DB) methods to contributory

Defined Contribution (DC) method. 37



– Data in Table 4 providing details of Subscribers registered

under NPS suggests the following :

» As on august 13th 2011, 2.43 million individuals were

registered. This is expected to increase significantly as

older civil servants retire.

» Nearly 30 percent were enrolled under NPS Lite which is » Nearly 30 percent were enrolled under NPS Lite which is

voluntary scheme. This reflects the impact of the

‘Swabalamban’ Scheme introduced by the Center in

2010. Under it, eligible subscribers receive rupees 1000

from the government each year, equivalent to 8 percent

of the total contributions. This co-contributory scheme is

valid for a total of 4 years.

» There is substantial scope for expanding the voluntary

membership under the NPS.

38

Table 4: Subscribers registered under NPS



39

Source: PFRDA website

http://pfrda.org.in/writereaddata/linkimages/SubscriberStatus1308119147235899.pdf



– As on July 16th ,2011 total balances in NPS were INR 99.2

billion (only 0.15 percent of 2010 GDP) but this is expected

to increase rapidly. The current NPS architecture is sound

and consistent with international best practices.

– The Standing Committee on Finance’ report on PFRDA

2011 Bill is retrogressive as it seeks to permit pre-retirement 2011 Bill is retrogressive as it seeks to permit pre-retirement

withdrawals; and recommends that the administered rates of

return equivalent to the EPFO dividends, be guaranteed.

This will fundamentally alter the character of the NPS.

– The press reports (epaper.livemint.com , Dec 22, 2011)

suggest that the PFRDA 2011 Bill has been removed from

the agenda of the 2011 Winter Session of the Parliament

due to reservations of UPA coalition member, Trinamool

Congress. This reflects the lack of urgency, concern, and

sophistication concerning pension reform in the country.40

The Way Forward/1

Broad suggestions for enabling India to prepare for the ageing society

are provided below:

(A)While not covered in this presentation, rapid ageing of India will

require a closer coordination between pension and health care

systems and organizations. The EPFO, ESIC, Ministry of Health,

and their private sector counterparts, including social enterprises, and their private sector counterparts, including social enterprises,

will need to consider complementarities among them to provide

pension and health care risk management at least cost to the

society .

(B) Rising working age to total population share implies the need to

shift the balance between preserving existing jobs and creation of

new jobs towards the latter. This will require reforms in several

areas, including in fiscal systems, and labor markets. Without these

reforms, the citizens will find it even more challenging to finance

their old age.41

The Way Forward/2

(C) Greater professionalism and System wide perspective in the social

security sector are needed. Modernization of the current provident

fund and pension fund laws is essential. The EPFO Act for example,

was enacted in 1952, its provisions including governance and

management practices require substantial modification for rapidly

ageing India.

(D) Refining the NPS:

(i) Reconsidering Mandatory Annuity Requirement: The

current design of both mandatory and voluntary NPS

mandates that at age 60, a member can withdraw 60

percent of the accumulated balances as a lump sum, but

at least 40 percent must be annuitized. It appears that

this design feature was incorporated without detailed

consideration of its appropriateness for the Indian

context. 42

The Way Forward/3

• There is merit in exploring various phased-withdrawal

program options. Under such a program, a member

retains the annuity component (40 percent) of

accumulated balances in a special interest-bearing

account, or invests in a senior- citizen- bond. This account, or invests in a senior- citizen- bond. This

arrangement does not require an individual to join an

insurance pool, but retain the balances under his or her

own name. Unlike annuities, balances remaining under

such a program when a person dies, can be inherited by

the designated nominees.

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The Way Forward/4

• Under the phased withdrawal, there is no insurance pool,

so a member retains the ownership of balances and

therefore nominees benefit in the event of member’s

death. PFRDA should encourage research and policy death. PFRDA should encourage research and policy

dialogue on phased withdrawal options appropriate for

the NPS. As there is no risk pooling. The trade-off is that

as compared to life annuity, longevity risk is inadequately

addressed.

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The Way Forward/5

• For India, phased withdrawal option may represent a

workable compromise between lump-sum withdrawal

and life annuity. This can also benefit micro-pension, and

occupational pension plans as they could adapt phased occupational pension plans as they could adapt phased

withdrawal plans to suit their requirements and context.

The design of the plans should be kept simple, and only

limited options should be permitted.

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The Way Forward/6

• Both empirical and theoretical research in this area also

needs to be encouraged. The PFRDA, in coordination

with IRDA (Insurance Regulatory and Development with IRDA (Insurance Regulatory and Development

Authority), should have well designed, user friendly and

updated website to provide information on annuities. Any

annuity requirement would however require strong

prudential regulation of insurance companies.

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The Way Forward/7

(II) Flexible Age of Exit from the NPS: There is a strong

case for making the age of exit from NPS more flexible.

Thus a member may chose to partially withdraw the

accumulated balances as lump-sum (60 percent); accumulated balances as lump-sum (60 percent);

purchase mandatory annuity and, as proposed above,

invest in a phased withdrawal plan, at any time between

the ages of 60 and 70.

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The Way Forward/8

This will have several advantages.

• First, it will permit individuals to enter NPS even between

ages of 55 and 60, and still have sufficient time to

accumulate retirement funds.

• Second, It will provide flexibility to individuals to choose • Second, It will provide flexibility to individuals to choose

the macroeconomic conditions, particularly the interest

rate conditions, under which to purchase annuities, and

participate in the proposed phased withdrawal program.

For greater flexibility the age of withdrawal of lump-sum,

and the purchase on annuity (and phased withdrawal

program) could be separated. Thus, a person could

withdraw lump-sum at age 60, but purchase the annuity

anytime between 60 and 70 years 48

The Way Forward/9

• Third, Flexibility in timing of annuity purchases will better

enable suppliers of annuities and bonds, such as life

insurance companies, to match their assets and insurance companies, to match their assets and

liabilities; and help manage uncertainties in longevity

trends.

• Lastly, as individuals continue to engage in paid

economic activities even after formal retirement, such

flexibility in the age of exit will enable them to better

achieve life-time consumption smoothing.

49

The Way Forward/10

(iii) Communication and Financial Literacy Initiatives: A

voluntary pension scheme does not attract large

numbers, even if tax, regulatory, and other measures are

favorable. For Voluntary NPS to become acceptable favorable. For Voluntary NPS to become acceptable

more widely, it will need to be popularized as a concept

through the help of variety of groups, such as the

cooperative societies, trade unions, NGOs and others.

India’s decentralized society is well suited for such

partnerships.

50

The Way Forward/11

(iv) The NPS Architecture is well-suited for realizing

economies of scale (as suggested by the negative

relationship between membership size and fees), and

economies of scope (as suggested by the use of its

architecture for the voluntary NPS available to all architecture for the voluntary NPS available to all

citizens). Given the need to economize on the scarce

expertise in negotiating CRA contracts and auctioning of

investment mandates, the States and other public sector

organizations should be encouraged to use the NPS

architecture.

(v) It is also essential that relatively low life-time

administrative costs of the current NPS arrangements be

sustained, and in particular distribution costs be

minimized.51

The Way Forward/12

(vi) Occupational Pension Plans: These plans require approval from the Income Tax Department. But, there appears to be little effective supervision after the approval. So, wide range of practices and lack of good quality and timely statistics. Passing of PFRDA Bill is essential for supervision of occupational plans. essential for supervision of occupational plans.

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The Way Forward/13

(E) Social pension schemes such as the Old Age Pensions (OAP) scheme will require greater fiscal resources and better delivery of pensions to the elderly. The fiscal reform and better delivery of government services will therefore be essential.

(F) As part of encouraging pension and health economics (F) As part of encouraging pension and health economics and overall financial literacy, there is a strong case for expanding the number and quality of post graduate level specialization in social security, particularly, pension economics, actuarial studies, and health policies and management in India.

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The Way Forward/14

(G)There is a case for setting up National Ageing Research Center to better prepare India for coming ageing society. It should however, be very cautious in suggesting inflexible Nation-wide scheme with high reversibility costs.

(H)The concept of productive ageing needs to be (H)The concept of productive ageing needs to be encouraged. In particular elderly will need to be able to be economically active even after institutional retirement age.

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References/1• Asher (2011), “PFRDA Bill 2011: To Build an Integrated Pension

System”, CFO Connect ,May 2011.

• Barr, N. and Diamond, P. (2008). Reforming Pensions: Principles

and Policy Choices. Oxford University Press.

• Bloom, D. (2011). Population Dynamics in India and Implications for

Economic Growth. Chapter prepared for The Handbook of the Indian

Economy (Chetan Ghate, Ed., Oxford University Press, forthcoming Economy (Chetan Ghate, Ed., Oxford University Press, forthcoming

2011). Available online at:

http://southasiainitiative.harvard.edu/Bloom_PopulationdynamicsiInd

ia.pdf

• Government of India, Employees Provident Fund Organization

(EPFO), Annual Report, various years

• Holzmann, R.; Robalino, D.; Takayama, N.(eds). 2009. Closing the

coverage gap: The role of social pensions and other retirement

income transfers (Washington, DC, World Bank).

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References/2

• ISSA (2009) Dynamic social security for Asia and the Pacific:

Integrated responses for more equitable growth (Developments and

trends). Geneva, International Social Security Association.

• Lee, R., Mason, A. and Cotlear, D. (2010), ‘Some economic

consequences of global aging’, World Bank, Washington, DC.

• OECD. 2006. Projecting OECD Health and Long-term care • OECD. 2006. Projecting OECD Health and Long-term care

expenditures: what are the main drivers? Economics Department

Working Paper No. 477. Available online at

http://www.oecd.org/dataoecd/57/7/36085940.pdf

• Shah, A. (2005), ‘A sustainable and scalable approach in Indian

pension reform’, Available electronically at

http://www.mayin.org/ajayshah/pensions.html, Last Accessed: 10

April 2006.

• Takayama, N. (2010) “Managing Pension and Healthcare Costs in

Rapidly Ageing Depopulating Countries: The Case of Japan”

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28 Keynote Address Mukul Asher

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Transcript of 28 Keynote Address Mukul Asher