Why India is heading towards a serious retirement crisis

We all work tirelessly our entire life so that we can lead a peaceful life with dignity in old age. Right? Unfortunately, in a country like India that is ageing fast, the vast majority of senior citizens is heading towards its worst nightmare — the crisis of survival without old-age pension.

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India looking at a pension crisis is not news; the real news is that most Indians are either ignorant of this, or have no choice as they are also weathering the cost of living crisis in today’s economy. And the policymakers are either not bothered about this gigantic challenge, or are clueless as to how to deal with it.

In India, the concept of social security doesn’t exist. The OPS (Old Government Pension Scheme) with periodic inflation-linked DA (dearness allowance) having been withdrawn, welfare schemes are mocked at as being muft ki rewari (free dole outs); and free ration and cash distribution is only linked to vote-bank politics, and not long-term welfare.

The previous generations didn’t face this pension crisis for many reasons:

• A strong family support system where children took care of parents. Today, with more and more nuclear families being the norm and young adults too struggling financially, that support system is gone.
• The Old Pension Scheme for government employees was a sort of social security. But now, the NPS (New Pension Scheme) or its new avatar, UPS (Unified Pension Scheme), is not that rewarding; is market-linked; and does not keep pace with inflation.
• For non-government employees, inherited land and property that appreciated was a financial support in the good old days. Today, with property purchase, it is only the bank and the builder that benefit. More importantly, with rental returns in the range of 2-3 per cent, real estate is not part of the retirement strategy of Indians, like in many other countries.
• Lower life expectancy was also a major reason why senior citizens didn’t need a huge corpus. But, with improvement in healthcare, life expectancy has also gone up.

It is hence no surprise that a report by UNFPA (United Nations Population Fund) claims that the current elderly population of 153 million (aged 60 and above) is expected to reach a staggering 347 million by 2050. So, the senior citizens would be 20.8 per cent, or one-fifth, of the population. India’s elderly population is predicted to overtake the number of children in the country. And a vast majority is financially not prepared for post-retirement life.

Meagre pension assets

A retirement crisis is silently brewing in India, where pension assets account for only 3 per cent of the gross domestic product (GDP). The Centre and states spent about Rs 9.6 trillion on the pensions of their employees in FY24 (revised estimates), accounting for 3.3 per cent of India’s GDP. Mind you, this 3.3 per cent pension asset is only a share of the GDP and not a national asset, that is way too higher.

A nation’s asset is far greater than its GDP, as GDP measures the value of goods and services produced within a country during the fiscal year, whereas asset combines all things of measurable value (financial and non-financial) within the country owned by the government, businesses and individuals.

Even with this benchmark of GDP only, India lags far behind developed nations, like 130 per cent in Australia, 100 per cent in the UK, and 150 per cent in the US.

According to a report by DSP Pension Fund, India’s retirement savings gap — the difference between what retirees need and what they have — is growing at 10 per cent annually and could hit $96 trillion by 2050.

In the 2024 Mercer CFA Institute Global Pension Index, India ranked last among 48 countries. This signifies a decline from its 45th position in 2023. The index assesses pension adequacy, sustainability, and integrity. India’s low ranking is attributed to factors like low pension coverage, inadequate retirement income, and a lack of regulatory oversight. Broadly, there are three pension schemes in India:

• NPS and UPS that replace OPS for public sector employees.
• NPS and EPF for organised private sector employees.
• NPS and PPF for unorganised sector workforce.

It is in this backdrop of grim reality that a number of banks and financial institutions are trying their best to penetrate the market but for all the wrong reasons, and with all the wrong products.

Misleading schemes

Most of the pension plans by banks and financial institutions in India are misleading, and some even club insurance with monthly payout schemes. But the deception here is that the rate of interest (RoI) is even less than the bank fixed deposits, and justification given in the name of insurance comes with so many riders that hardly any individual or anyone in the family avails of the benefits.

For example, a bank is offering a pension scheme of Rs 30,000 per month after depositing Rs 10 lakh yearly for 5 years “only”. Now, this “only 5 years” might appear lucrative. But when calculated with the average returns of this investment, say 7-8 per cent, the amount becomes more than Rs 60 lakh in 5 years. And a simple bank FD at the rate of 7 per cent would offer more than Rs 35,000 per month. Ironically, there is no regulatory crackdown against such dubious pension schemes.

The pension crisis is a much serious issue where most of the seniors in the coming days are expected to exhaust their corpus before their lifespan. But then, who cares in an insensitive society that looks towards senior citizens as a liability? The legislators would continue to get all the pension benefits. And the elderly population only has various schemes on paper for different sections — government employees, private sector workforce and BPL.

There, of course, lies a disclaimer — why should the future generation of taxpayers fund the pension of retirees? The logic, or the lack of it, is baffling, as if the senior citizens in their working years have not paid their due direct and indirect taxes. The lack of social security for retirees mocks at the claims of being the fastest growing economy with a heavy tax burden on the citizens.

Last, but not the least, the NPS and UPS pension payouts are market-linked. While the conventional wisdom of finance suggests that a retired person should stay away from market fluctuations, your pension funds are ironically designed to keep you invested in the market.

This could only happen in a country where the public sector insurance company LIC, that is the custodian of pension funds of many retirees, is allowed to invest in the bonds of a pampered crony capitalist. I rest my case.

— The writer is CEO, Track2Realty