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Dynamics of Population Ageing: How Can India Respond?
 Dr. Tarun Das, Economic Adviser, Ministry of Finance, India. And Consultant, UN-ESCAP, Bangkok, Thailand.
1. Introduction
Like other countries India is confronted with the problem of ageing of population.According to some estimate, number of Indians over 60 years will grow from 76 millionin 2000 to more than 218 million by 2030. Social Security System that prevails in Indiahas not been very effective to provide coverage to the existing population and to confrontthe challenges emerging due to ageing and fiscal constraints. Government is attemptingto revamp Indian Social Security System, and to put in place mechanism of SocialSecurity.Social Security Reforms form an integral part of ongoing reforms in developed anddeveloping countries. The policy makers try to find out an appropriate mechanism toconfront to complex issues related to demographic burden owing to population ageing,growing inability of the government to finance unfounded pensions, pressure ongovernment budget due to increasing costs of retirement benefits. Pension Reforms have,therefore, become a hot pursuit for planners, policy makers, market analysts.
2. Present Social Security System in India
Present system of Social Security in India is based on three components, namely;Compulsory contribution, Tax Preferred Voluntary Contribution, and Social Assistance(
Table-1)
. Compulsory component includes Employees Provident Fund (EPF),Employees Pension Fund, and Central Service Pension Scheme to the GovernmentProvident Fund, Special Provident Fund. Tax Preferred Voluntary component includesPublic Provident Fund (PPF), Superannuation Plans and Personal Pensions. SpecialAssistance Component
 
includes State level Social Assistance and National old age pension scheme. The Employees Provident Fund Organisation (EPFO) managesemployees Provident Fund Scheme 1992, Employees Deposit Link Insurance Scheme1996, Employees Pension Fund 1995, under EPF Schemes.Out of total work force of 400 millions EPF cover 26 million members and the other mandated Provident Funds covered 2 million, EPFO administered the EPF – collectsmoney and maintains records, invest funds according to government guidelines.By the end of March 2000, PF & Pension Funds amounted to 23% of gross householdfinancial assets and 2.8% of GDP next to the share of banking sector. By the end of March 2000, EPFO covered 24.5 million members under 33 million establishments.Progressive contributions under Employees’ Provident Fund, Employees’ Pension Fund43
 
and Employees’ Deposit Linked Insurance Fund stood at Rs.752 billion, Rs.42 billion andRs.1.3 billion respectively.Progressive investment by EPFO during 1999-2000, stood at Rs.792 billion for ProvidentFund, Rs.274 billion for Pension Fund, and Rs.2.8 billion for Deposit linked Insurance.The rate of interest for EPF has been reduced progressively from 12% in 1999-2000 to9.5 percent in 2004-05. The total Pension Fund in India at the end March 1996 wasestimated at Rs.1283 billion around 11.7% of GDP). EPF 1952 is the largest among allschemes, which accounts for 46% of total funds. The rate of contribution under EPFvaries from 8.33% to 10%. The EPF is managed by the Central Provident FundCommissioner, which invests the funds through State Bank of India as per GovernmentGuidelines. According to the government norms, minimum 40% is invested in Centraland State Government bonds, 40% in Securities of Public Financial Institutions, PublicSector Enterprises, Banks etc. and 10% can be invested in the rated Private Sector Bonds.
Table-1: Government sponsored schemes for old age security in IndiaSchemeLegal coverageEffective coverageFinancingA. Compulsory contributions
1. EmployeesProvident SchemeEmployees in firmswith more than 20employeesAbout 5.8 per centof labour forceEmployer andemployeecontributions2. EmployeesPension FundEmployees in firmswith more than 20employeesAbout 5.4 per centof labour forceEmployer andgovernmentcontributions3. Civil ServicePension SchemeCivil servants inCentre and stategovernmentsAbout 3.5 per centof labour forceState or Centregovernment4. GovernmentProvident FundCivil servants inCentre and stategovernmentsAbout 3.5 per centof labour forceEmployeecontribution5. Special ProvidentFundsCertain occupationsin Jammu &Kashmir About 0.5 per centof labour forceEmployer andemployeecontributions
B. Tax preferred Voluntary Contributions
6. Public ProvidentFundAll individualsAbout 0.8 per centof labour forceIndividualcontributions7. Superannuation plansAll employeesAbout 0.2 per centof labour forceEmployeecontributions8. Personal pensionsAll individualsAbout 0.2 per centof labour forcePurchase of annuitylike products
C. Social assistance
9. State level socialassistanceVaries by statesVaries by statesState budgets10. National old age pension schemePersons over age 65yearsAbout 15-20 per cent of old people of Central budget44
 
over 65 years
3. Pension reformsin India
The pensions system in India is large and fragmented, while the majority of the country'slabour force operate in the informal sector and lack coverage. Government is preparing toreform the system by simplifying regulation, widening accessibility and extending pension provisions into the unorganized sector, estimated at around 93% of the labour force. Government is examining the possibility of establishing a single regulatoryauthority to cover both the pensions and insurance sectors.
Current national pensions system
consists of four main components:
1.
Private-sector cover.
The Employee Provident Fund Organisation (EPFO)functions under the Ministry of Labour and is primarily responsible for theretirement income of private-sector employees. It consists of a mandatory savingsdefined contribution scheme, known as the Employee Provident Fund, and adefined benefit scheme -- the Employees Pension Scheme (EPS). The EPFO isapplicable only to those enterprises with at least 20 employees and covers justover 5% of the country's total labour force. Nevertheless, its total assets are large,amounting to around 7% of GDP.
2.
State-owned schemes.
Some public-sector financial organizations such as banks,insurance companies and state-owned enterprises, offer stand-alone retirementschemes. They typically operate with fixed terms and permit withdrawals after aminimum period.
3.
Civil service provision.
Civil servants at both central- and state-governmentlevels have their own retirement benefits scheme. This includes a non-contributory, indexed defined benefit (DB) pension, with survivors' benefits, amandatory provident-fund savings scheme to which a defined contribution ismade, along with a gratuity. The government is liable for the entire scheme.
4.
Post Office scheme.
India's Post Office Savings Bank (IPOSB) is the only public-sector organization that operates voluntary retirement schemes. The IPOSBis the single largest financial institution in the country, controlling depositsequivalent to 9% of GDP.However, overall, the pensions system is beset with chronic problems, including:
•
Poor management of a large asset pool;
•
Exclusion of the vast majority of the labour force, who are dependent onvoluntary retirement schemes;
•
Lack of pensions harmonization, which impedes employee mobility and labour market flexibility;
•
Low flexibility in fund management and restrictions on portfolio choice; and45
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