Analysis. Gaps in pension security

Worldwide, pension planning is the bedrock of social security as it helps people in their sunset years have steady income and access to essential services including healthcare.

Public social security expenditure on pensions and other non-health benefits earmarked for senior citizens amounts, on an average, to 3.3 per cent of the global gross domestic product.

India, however, comes up very short on public spending on pensions and other benefits (excluding health), at a paltry 0.7 per cent. The big problem for the country is that the majority of its workforce — over 80 per cent — is in the unorganised sector. While the Central and State governments do have plans to get them under some pension umbrella, the efforts have been fragmented and inadequate.

Wide variations

Further, pension-inclusion levels vary across States. CRISIL recently analysed this based on the following parameters:

Socio-economic support: Traditional support systems for the elderly, though well above advanced economies, have been on a decline because of increasing nuclearisation of families and migration. We analysed this along three flanks — family support (excludes those who live alone or only with their spouse), elderly working (out of necessity or by choice) and the elderly below poverty line.

The result showed that Haryana, Kerala, Goa and Punjab stand high on socio-economic support, in addition to having high per-capita income. Meanwhile, low per-capita States such as Bihar and Chhattisgarh fall low on this parameter, and thus would need assistance from the government on a much larger scale.

Pension coverage: This parameter looked at the coverage, which — in addition to being low when compared with developed counterparts — also differed among States in terms of pensioners and subscribers (under Employees Provident Fund Organisation or the National Pension System).

This analysis showed that Haryana, Karnataka, Andhra Pradesh, Tamil Nadu, Maharashtra and Punjab have moderate pension coverage, while Bihar, Uttar Pradesh and Rajasthan are laggards. Low-coverage States such as Bihar and Madhya Pradesh also came up short on socio-economic support, and thus there is a need to promote pension schemes for the working-class population, to avert high fiscal burden in terms of social security, in the years to come.

Fiscal position of States: While the Centre has transitioned to the defined contribution (DC) model of pension system for the organised sector, some States still follow the defined benefit (DB) method.

It is thus imperative for States to de-risk their finances to be able to spend money on its elderly (pension spends as a portion of their gross State domestic product (GSDP)), and know if there’s wherewithal to spend more (indebtedness) if the number of senior citizens increases in the future. Higher the debt-to-GSDP ratio, lower is the opportunity for a State to manoeuvre its pension spending if the liability drastically increases in the future.

Maharashtra, Karnataka, Chhattisgarh, Gujarat and Telangana seem well-positioned on this parameter, while Bihar, Kerala, Punjab and UP are the laggards — they would need to think out of the box to manage their pension liabilities in the near-to-medium term, especially if the number of elderly surges.

Policy initiatives by States: India has laid down rules and policies as part of the National Policy for Senior Citizens, but the implementation — in addition to specific spending — differs across States. For this parameter, we analysed the States’ contribution to social security and health expenditure and also their contribution to Centre-sponsored old-age schemes. Goa, Odisha, Kerala and West Bengal rank high on this parameter.

Way forward

Ageing States which have fiscal room, such as Maharashtra, Karnataka, Gujarat, Tamil Nadu and Haryana, can look at market-linked pension products for non-retirees, plan a social pension scheme for the elderly, and work out better annuities. On the other hand, ageing States with limited fiscal room, such as West Bengal, Kerala and Punjab, can also look at promoting market-linked products for non-retirees and develop better annuities.

Meanwhile, young States having fiscal room, such as Chhattisgarh, Odisha and Madhya Pradesh, can look at having a targeted social pension scheme for the elderly, while also trying to promote participation in pension products through co-contribution. States which are young but do not have the fiscal room, such as Jharkhand, Rajasthan, Uttar Pradesh and Bihar, can focus on employment in the formal sector, increase awareness on Centre-sponsored schemes, and leverage Pradhan Mantri Jan Dhan Yogana and Aadhaar to improve efficacy.

Further, it is important to use Jan Dhan, Atal Pension Yojana and the National Health Protection Scheme for efficient micro-insurance and micro-pension administration. There is also an urgent need to create a central repository of pension data for taking efficient actions and removing information asymmetry.

All in all, while the government moves towards achieving a pensioned society, it is crucial that it takes focussed policy actions to target the differences among States, to achieve a balanced outcome across the country.

The writer is Senior Director, CRISIL Fixed Income and Fund Resarch.

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