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India needs to design proper pension programme to alleviate poverty of elderly

The government should accept the Pension Parishad’s recommendation to raise the pension amount to improve the well-being of the elderly.

Last Updated: May 31, 2012, 07.50 AM IST|Original: May 31, 2012, 05.29 AM IST
India needs to design proper pension programme to alleviate poverty of elderly
For nearly two decades, the Government of India has implemented a stingy pension programme for the elderly poor. “An insult to the dignity” of the elderly is how rural development minister Jairam Ramesh describes the pension amount of Rs 200 per month given under the Indira Gandhi National Old Age Pension Scheme (IGNOAPS).

A few states provide a somewhat generous supplemental pension, most provide a tiny supplemental amount, some nothing at all. The government should accept the Pension Parishad’s recommendation to raise the pension amount to improve the well-being of the elderly.

Indeed, there should be a cost of living adjustment embedded in the scheme so that the value of the pension is not eroded with inflation. Simply raising the pension amount may not make a big dent in elderly poverty, however. Given our experience with welfare schemes, a more generous scheme will increase incentives for diversion of funds away from the poor and underprivileged.

This brings us to the second major recommendation of the Pension Parishad: the government should do away with the BPL and APL criterion for pension eligibility. Another sensible suggestion -— endorsed by Ramesh.

The prime minister should accept it too. This column is, however, about Pension Parishad’s third major recommendation: lowering pension eligibility age to 50 for women and 55 for men. This is a misguided recommendation and should be dismissed. The average retirement age in nations in the Organisation for Economic Co-operation and Development (OECD) countries is 62.5 years and is projected to increase over the next decade. There is no reason why India should have a lower retirement age.

There should be a clause embedded in IGNOAPS to increase the minimum pension eligibility from the current 60 by one year every five years till it is 67. The elderly population in India is projected to triple by 2050, a faster increase than what is projected for the rest of the world. Raising age eligibility is therefore critical for the long run viability of IGNOAPS.

It will keep growth in the number of beneficiaries in check and the financial pressure on account of demographic changes under control.

The expenditure on IGNOAPS has increased fivefold since 2006, its last major expansion when the pension amount was raised from Rs 75 to Rs 200. The expenditure would increase further if the suggestions currently proposed by Pension Parishad are accepted. While currently pension does not impose a fiscal challenge, it would be irresponsible to design a pension scheme without regard to its future sustainability.

Besides fiscal considerations, there are other arguments for increasing the retirement age. Research on retirement behaviour in rich, as well as developing countries documents that near elderly persons reduce their work effort in response to pension programmes.

In countries with low eligibility age, individuals seek early retirement. Consider this: Greece has an early retirement age of 50. In 2005, only 31% of its population aged 55-59 were employed; 18% of the population aged between 60 and 64 and less than 4% of the 65+ population were working. At 65, the early retirement age in Germany is much higher and its employment pattern reflects this. In 2005, almost two thirds of the near-elderly, aged between 55 and 59, were working as were about a quarter of those aged between 60 and 65.

In response to pressures from rising longevity, population ageing and growing social security bills, in recent years, half the OECD countries have raised the minimum age for pension. Others are struggling to do the same to avert or postpone social security crises. As expected, it has become a highly contentious political issue. The elderly are an influential voting bloc. Many OECD countries are finding it difficult to roll back privileges once granted. Meanwhile, social security challenges have kept on mounting.

The OECD 2011 report, Pension at a Glance-2011, has projected the average pension age in OECD countries to rise to 65 by 2050. Pension benefits in OECD countries will also have to be lowered to avert social security crises. We in India can learn from the experience of rich and other developing countries as we design and strengthen a social security program for the elderly.

It is fair to argue that the current public pension program, IGNOAPS, is too modest to make an impact on the elderly poor. In states that provide a somewhat generous supplementary pension, perhaps the programme is working better. But there is also concern that benefits bypass the poorest of the poor. Low income and no savings result in most poor elderly men in India working past what has been the conventional retirement age in western countries or even the retirement age that the rich in India enjoy.

This is not desirable for those who work in physically strenuous occupations. For those who cannot work, family is the only form of social security. Rapid economic and social changes in recent years, including migration and urbanisation of young adults, have weakened India’s joint family system, leaving the elderly in vulnerable economic conditions. Thus we do need a strong social security system for the elderly.

The system, however, should be so designed that it improves the well-being of the elderly without unduly changing employment incentives of the workforce. And most of all, the program should be sustainable in the long run when demographic forces will be less favourable.

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