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Mukul G Asher Professor of Public Policy Lee Kuan Yew School of Public Policy National University of Singapore E-mail: mukul.asher@gmail.com
To be presented at Sixth Annual International Conference on Public Policy and Management, IIM Bangalore, December 28-30 , 2011
Organization
Introduction Trends in Indias Ageing in a Global Perspective Fiscal and Labor Market Implications Indias Social Security System: Characteristics and Limitations. The Way Forward
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. 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.
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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 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.
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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 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.
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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 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.
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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).
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Population aged 60 or over (million) 2010 2030 759.1 (11.0) 1370.4 (16.5) 413.6 (9.9) 821.2 (16.7)
Population aged 80 or over (million) 2010 2030 105.6 (1.5) 194.2 (2.3) 47.3 (1.1) 99.2 (2.0)
1.5 (6.0) 0.0 (1.2) 40.9 (2.8) 18.0 (1.2) 4.2 (1.5) 15.1 (12.9) 0.6 (1.6) 0.3 (5.4) 0.0 (0.5) 1.3 (1.1) 2.5 (5.1) 0.3 (5.9) 1.6 (2.2) 1.9 (1.8)
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World Asia Asia-Pacific Countries Australia Brunei China India Indonesia Japan Malaysia New Zealand Papua New Guinea Philippines Republic of Korea Singapore Thailand Viet Nam
1.85 1.95 1.79 2.52 2.02 1.27 2.35 2.02 3.77 2.85 1.26 1.29 1.85 1.95
1.85 1.85 1.85 1.96 1.85 1.4 1.87 1.85 2.8 2.35 1.39 1.44 1.85 1.85
82.2 77.7 74.0 65.2 72.2 83.7 75.2 81.0 62.3 72.9 80.0 81.0 69.9 75.4
84.1 79.1 76.6 69.4 75.7 85.3 77.5 83.0 66.7 75.8 81.7 82.6 73.5 78.0
37.8 27.8 34.2 25.0 28.2 44.7 26.3 36.6 20.0 23.2 37.9 40.6 33.2 28.5
41.2 33.7 41.1 31.7 35.4 52.2 33.2 40.2 24.6 29.0 47.6 48.4 38.8 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.
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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). 14 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.
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India, 2050
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Source: Barr and Diamond, 2008.
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Source: Barr and Diamond, 2008.
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
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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, co24 contributory Swabalamban Scheme on a voluntary basis was introduced for those in the unorganized sector Source: Author
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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.
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Source: Calculated by the author based on EPFO various years; RBI Various Years.
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(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 42 context.
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Both empirical and theoretical research in this area also needs to be encouraged. The PFRDA, in coordination 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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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); 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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voluntary pension scheme does not attract large numbers, even if tax, regulatory, and other measures are 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. Indias decentralized society is well suited for such partnerships.
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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 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 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 56 processed