Preparing for Ageing India

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

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Organization
• Introduction • Trends in India’s Ageing in a Global Perspective • Fiscal and Labor Market Implications • India’s Social Security System: Characteristics and Limitations. • The Way Forward

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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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Figure 1: Population Aged 15-59 for Asia-Pacific Economies -19502050

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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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Trends in India’s Ageing in a Global Perspective/1
• This section provides an overview of trends in India’s ageing in a Global perspective. • Table1A-1C provide selected demographic indicators for the world, Asia, and India and other countries for 2010-2030. • Asia will experience faster ageing than the rest of the world. • In 2030, it will contain 60 percent of the global population above 60 years and 51 percent above 80 years. These proportions are much higher than the corresponding figures for 2010, 54.5 percent and 44.7 percent respectively.
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Trends in India’s Ageing in a Global Perspective/2
• India’s share in Global population above 60 years will rise from 12 percent in 2010 to 13.4 percent in 2030. the corresponding increase in population aged 80 or over will be 0.8 percent to 0.9 percent. • In 2030, there will be 185 million Indians above 60 years of age. This is a large number, and any design or other errors in structuring policies for them could prove to be very costly. • India’s life expectancy at age 60 (which is the relevant figure for analyzing ageing) was 16. 9 years during 2005-2010 but is projected to increase to 17.3 years by 2015-2020.(these data are based on UN sources).thus, each person will have to be 9 supported for a longer period.

Trends in India’s Ageing in a Global Perspective/3
• As health expenditure increase disproportionately with age, trends in longevity are of particular relevance when assessing financial sustainability of financing old age.

• 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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Trends in India’s Ageing in a Global Perspective/4
• Takayama’s (2010) estimate of health expenditure being 4.8 times higher for an individual aged above 65, using disaggregated age-specific health expenditure data from Japan, corroborates the OECD findings. • Age related pension and health expenditure will rise for the country, and this will have to be shared through public intermediation, and community, family and individual sources. It is in this context that fiscal capacities and efficiency of public delivery system become of crucial importance
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Trends in India’s Ageing in a Global Perspective /5
Table 1A: Asia-Pacific Countries: Selected Demographic Indicators
Country Year World Asia Asia-Pacific Countries Australia 22 26 4.2 (19.5) 6.8 (26.5) 0.8 (3.9) Brunei 0 1 0.0 (5.8) 0.1 (13.5) 0.0 (0.5) China 1,354 1,462 166.5 (12.3) 342.3 (23.4) 19.3 (1.4) India 1,214 1,485 91.7 (7.5) 184.6 (12.4) 8.1 (0.7) Indonesia 233 271 20.8 (8.9) 43.4 (16.0) 1.8 (0.8) Japan 127 117 38.7 (30.5) 44.5 (37.9) 8.1 (6.3) Malaysia 28 35 2.2 (7.8) 5.3 (15.0) 0.2 (0.7) New Zealand 4 5 0.8 (18.2) 1.3 (26.3) 0.2 (3.5) Papua New Guinea 7 10 0.3 (4.2) 0.7 (7.3) 0.0 (0.2) Philippines 94 124 6.2 (6.7) 14.1 (11.3) 0.5 (0.5) Republic of Korea 49 49 7.6 (15.6) 15.3 (31.1) 1.0 (2.0) Singapore 5 5 0.8 (16.0) 1.9 (35.6) 0.1 (2.0) Thailand 68 73 7.9 (11.5) 15.8 (21.6) 0.8 (1.2) Viet Nam Source: Population Division of the Department of Economic and 19.2 (18.2) of the United(1.3) 89 105 7.8 (8.7) 1.1 Nations Social Affairs
Secretariat, World Population Prospects: The 2008 Revision, http://esa.un.org/unpp

Total Population (million) 2010 2030 6,909 8,309 4,167 4,917

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)

Note: Numbers in parentheses is the percentage of total population above 60 and 80

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Trends in India’s Ageing in a Global Perspective/6
Table 1B: Fertility Rate, Life Expectancy and Median Age in Asia-Pacific Countries
Country Total Fertility Rate 2010-2015 2.49 2.26 2025-2030 2.21 2.01 Life Expectancy at Birth 2010 68.9 70.3 72.1 73.6 2030 29.1 29.0 2010 34.2 35.2 Median Age 2030

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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Trends in India’s Ageing in a Global Perspective/7
Table 1C: Trends in Old-Age Dependency Ratios in Asia-Pacific Countries
Country 2010 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 21 (4.8) 5 (20.0) 11 (9.1) 8 (12.5) 9 (11.1) 35 (2.9) 7 (14.3) 19 (5.3) 4 (25.0) 7 (14.3) 15 (6.7) 14 (7.1) 11 (9.1) 9 (11.1) 34 (2.9) 13 (7.7) 24 (4.2) 12 (8.3) 15 (6.7) 53 (1.9) 15 (6.7) 33 (3.0) 7 (14.3) 12 (8.3) 36 (2.8) 46 (2.2) 23 (4.3) 18 (5.6) 12 (8.3) 10 (10.0) 18 (5.6) 17 (5.9) Old Age Dependency Ratio 2030

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.

Trends in India’s Ageing in a Global Perspective/8
• Figures 2-5 provide a century of demographic transition in India, China and US. • That three countries which are very different are projected to exhibit broadly similar population pyramid by 2050 reflects global ageing phenomenon.

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Trends in India’s Ageing in a Global Perspective/9
India will Age rapidly while still being a middle income country
Figure 2: India’s changing population age cohorts
India, 1950 India, 2010

India, 2050

Source: Bloom, 2011.

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Trends in India’s Ageing in a Global Perspective/10
India will Age rapidly while still being a middle income country
Figure 3: India’s changing population age cohorts

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Trends in India’s Ageing in a Global Perspective/11
Figure 4: Demographic Trends and Projections – China

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Source: Barr and Diamond, 2008.

Trends in India’s Ageing in a Global Perspective/12
Figure 5: Demographic Trends and Projections – U.S.

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Source: Barr and Diamond, 2008.

Fiscal and Labor Market Implications/1
These imperatives will impact in the following ways: •As noted, the current global environment is harsh on those countries whose fiscal management is perceived to be both in accordance with macro economic sustainability. This is exemplified by the current developments in the Euro-zone, where sovereign risk for Greece , Portugal, Spain, and perhaps Italy is inordinately high, endangering the future of Euro. •Given that India's combined fiscal deficit exceeds 10 percent of GDP and its internal debt is quite high(general government debt was estimated to be 73 percent of GDP in 2009-10,when internationally above 60 percent is regarded as a matter of concern) finding fiscal resources to meet the needs of the ageing society will be a huge challenge. Rising interest rates, and increasing risk perceptions of India globally pose additional challenges. •The individuals and households will need to assume greater responsibility for financing their old age, even as their tax burdens will rise substantially.
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Fiscal and Labor Market Implications/2
•The individuals are also affected by the overall policy environment, including labor laws and practices, which are not conducive to generation of productive livelihoods with opportunities to generate sustainable higher incomes by providing skills which are in demand in the dynamic and changing market place. •Thus, between 2004-05 and 2009-10 the economy generated only 2.6 million jobs (against the target of over 50 million jobs) at the time when number of livelihood seekers is rising rapidly due to the demographic phase in which the share of working age population to total population is increasing (Table 2).
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Fiscal and Labor Market Implications/3
Table 2: The Changing profile of the Indian Workforce

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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Fiscal and Labor Market Implications/4
•The citizens therefore, have strong self interest to demand from the policy makers, a better policy environment and labor laws which are more conducive to perusing flexible careers and livelihoods, and to net formation of businesses. •The stable long term employer-employee relationship is increasingly not a dominant norm, and the young will therefore need to be adaptable and flexible in perusing their livelihoods.
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India’s Social Security System: Characteristics and Limitations/1
Figure 6 : India’s Social Security System

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

India’s Social Security System: Characteristics and Limitations/2
• Key characteristics and limitations may be summarized as follows:
– Lack of systemic prospective integrating different components of the system. – Lack of professionalism among the provident fund and pension fund institutions. Outdated provident and pension fund laws and regulations, and civil service employment contract designed for a different era, are contributing to the lack of professionalism. – Lack of sufficient level of pension, financial and broader economic literacy, reflected in poor design, inefficient delivery systems, weak learning curve effects for relevant provident and pension fund organizations. – Insufficient focus on fundamentals of generating and sustaining high growth.
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India’s Social Security System: Characteristics and Limitations/3
Lack of Professionalism and the EPFO: – Unusual in combining both DC and DB schemes – Set up in 1952 as a mandatory scheme for private sector employees. As at March 31st 2009, it had staff strength of 19,500, rather large by international standards. – As at 31st March 2009, The EPFO covered only 0.57 million establishments (roughly same as Malaysia which has a population of 25 million); its total membership was 47 million for the EPF, and 45 million for the EPS. – The actual contributing members have not been provided but they are believed to be around half of the total, (4.7% of labor force). This is indeed quite a low average after nearly 60 years of operation. Combined contribution rate: 25.7% of wages, rather on the high side. There are proposals to increase it further, which could 26 adversely impact job creation in the formal sector.

India’s Social Security System: Characteristics and Limitations/4
• EPFO is among the largest non banking-financial institutions (NBFIs) with assets of over INR 3,488 billion in 2009, equivalent to 6.2 per cent of India’s 2009 GDP. • Its investment portfolio is in domestic debt instruments, primarily public sector debt, it therefore has no equity exposure, which makes its portfolio risky due to lack of diversification, and less able to earn returns for its members. • As at 31st March 2009, the Provident Fund arrears were nearly Rs 3000 crore. , which is about 10 percent of the contributions received. This suggests poor collection capabilities.
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India’s Social Security System: Characteristics and Limitations/5
• There is a large actuarial deficit in the EPS. The recent actuarial reports of the EPS, which have not been made public (but should be), suggest that the deficit is in the region of INR. 500 billion, and this is expected to rise significantly. • As a result, ad- hoc changes are being introduced in the DB scheme, such as the recent decision to end the commutation of pensions (which permits lump sum withdrawal of future pension benefits, subject to a limit). These however have inconvenienced the members.

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India’s Social Security System: Characteristics and Limitations/6
• Key challenge for the EPFOto provide quality of service and retirement income security commensurate with the costs imposed on the economy. The EPFO should aim to become professional world-class service provider, regulated by a pension regulator. Its role as a service provider should be separated from its role as a regulator of exempt funds. Politicization of the EPFO will need to be reversed. Can the transformation of the EPFO be accomplished?

-

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India’s Social Security System: Characteristics and Limitations/7
• Evidence is mixed. Essentially, newer developments in the pension sector (the NPS, private market players extending their role, more demanding membership, etc.) and broader changes in the economy are impacting EPFO’s monopoly position, and demanding greater accountability and transparency. • Giving EPFO members a choice for contributing to NPS will improve contestability and provide information to the policy makers about the retirement benefits and quality of services. Only the EPF scheme is compatible with NPS. Therefore the EPS Scheme cannot be subjected to such a choice

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India’s Social Security System: Characteristics and Limitations/8
– But EPFO’s:
• governance structure (45 member Board, with Minister of Labor as chairman; • limited access to outside expertise) • poor design of its schemes; • lack of appropriate organizational and individual incentives; • outdated budgetary and record-keeping systems due to modest IT systems and absence of apperoperiate investments in human resources suggest that reforming it will be a huge challenge.
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India’s Social Security System: Characteristics and Limitations/9
• The outcome of the EPFO policies and practices is reflected in the balances of the members shown in Table 3. • The balances of the members is not only low, but 16% members accounted for 84% of the balances in 2004. • Such data, which should be routinely made available, is not by the EPFO, so only one-off 2004 data are available. • This suggests that any interest subsidy to EPFO members accrues to those in the higher wage groups.
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India’s Social Security System: Characteristics and Limitations/10
Table 3 : India: Members’ Balances in the EPF, 2004
Balance (in Rs.) Up to 20,000 20,000 - 49,999 50,000 - 99,000 1 lakh – 1.99 lakh 2 lakh – 2.99 lakh 3 lakh – 3.99 lakh 4 lakh – 4.99 lakh 5 lakh – 9.99 lakh 10 lakh – 24.99 lakh 25 lakh – 49.99 lakh Above 50 lakh No. of members 293.4 lakh 28.77 lakh 12.77 lakh 7.91 lakh 2.33 lakh 82,629 34,593 36,297 5973 5973 86 % of total members 84.58 8.30 3.68 2.28 0.67 0.24 0.10 0.10 0.02 0.0001 0.00001 % of total accumulation 16.98 21.52 16.67 20.25 10.37 5.23 2.83 4.29 1.45 0.31 0.90 Average Balance (in Rs.) 3133 40,468 70,663 1,38,414 2,40,616 3,41,959 4,42,575 6,40,229 13,16,782 25,06,620 54,48,660
Source: EPFO

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Note: 1 lakh = 0.1 million

India’s Social Security System: Characteristics and Limitations/11
•Figure 6 provides nominal and real rates of dividends declared by the EPFO for the year 1990-91 to 2008-09 period. •The nominal rate is relatively stable but the real rate has fluctuated considerably, and as exhibited downward trend since 2001-02. •EPFO’s zero allocation for equities as an asset class; and its practice since 1952 to deliberate on the dividends to be paid before the financial year is over reflect its inability to adjust to India’s new economic policies and to international best practices. •The zero allocation to equities has given undue prominence to the role of the foreign financial institutions(FII) in India’s stock market, arguably increasing volatility.

•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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India’s Social Security System: Characteristics and Limitations/12
Figure 7

Source: Calculated by the author based on EPFO various years; RBI Various Years.

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India’s Social Security System: Characteristics and Limitations/13
– Low coverage of the population and the type of risks covered. Low coverage of the EPFO schemes has been noted. Even if all the contributory and civil service schemes are considered, the total coverage is unlikely to exceed one-fifth of the labor force. The coverage among the elderly is even lower. – Even the OAP, where center and the state sharing cost coverage no more than 25 percent of the eligible group, with wide variations across country. the benefit levels are also quite low, though they have been raised recently. – Lack of uniformity in pension protection among different groups, with civil servants receiving disproportionate share of India’s resources devoted for pensions.

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India’s Social Security System: Characteristics and Limitations/14
– Thus, pension cost of India’s 22 million civil servants constituting around 4.6 percent of the labor force are around 1.6 percent of GDP and this will approach 2 percent of GDP in spite of the introduction of the New (now National) Pension Scheme (NPS) for civil servants in 2004. – Cash accounting systems in government grossly understate the pension and healthcare benefits which have already accrued. – There are also no assets set aside to meet government provident fund and pension and health care liabilities in an orderly manner. – The NPS shifts the civil service pension systems from noncontributory Defined Benefits (DB) methods to contributory Defined Contribution (DC) method.

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India’s Social Security System: Characteristics and Limitations/15
– Data in Table 4 providing details of Subscribers registered under NPS suggests the following : » As on august 13th 2011, 2.43 million individuals were registered. This is expected to increase significantly as older civil servants retire. » Nearly 30 percent were enrolled under NPS Lite which is voluntary scheme. This reflects the impact of the ‘Swabalamban’ Scheme introduced by the Center in 2010. Under it, eligible subscribers receive rupees 1000 from the government each year, equivalent to 8 percent of the total contributions. This co-contributory scheme is valid for a total of 4 years. » There is substantial scope for expanding the voluntary membership under the NPS.
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India’s Social Security System: Characteristics and Limitations/16
Table 4: Subscribers registered under NPS

Source: PFRDA website http://pfrda.org.in/writereaddata/linkimages/SubscriberStatus1308119147235899.pdf

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India’s Social Security System: Characteristics and Limitations/17
– As on July 16th ,2011 total balances in NPS were INR 99.2 billion (only 0.15 percent of 2010 GDP) but this is expected to increase rapidly. The current NPS architecture is sound and consistent with international best practices. – The Standing Committee on Finance’ report on PFRDA 2011 Bill is retrogressive as it seeks to permit pre-retirement withdrawals; and recommends that the administered rates of return equivalent to the EPFO dividends, be guaranteed. This will fundamentally alter the character of the NPS. – The press reports (epaper.livemint.com , Dec 22, 2011) suggest that the PFRDA 2011 Bill has been removed from the agenda of the 2011 Winter Session of the Parliament due to reservations of UPA coalition member, Trinamool Congress. This reflects the lack of urgency, concern, and sophistication concerning pension reform in the country.

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The Way Forward/1
Broad suggestions for enabling India to prepare for the ageing society are provided below: (A)While not covered in this presentation, rapid ageing of India will require a closer coordination between pension and health care systems and organizations. The EPFO, ESIC, Ministry of Health, and their private sector counterparts, including social enterprises, will need to consider complementarities among them to provide pension and health care risk management at least cost to the society . (B) Rising working age to total population share implies the need to shift the balance between preserving existing jobs and creation of new jobs towards the latter. This will require reforms in several areas, including in fiscal systems, and labor markets. Without these reforms, the citizens will find it even more challenging to finance their old age.

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The Way Forward/2
(C) Greater professionalism and System wide perspective in the social security sector are needed. Modernization of the current provident fund and pension fund laws is essential. The EPFO Act for example, was enacted in 1952, its provisions including governance and management practices require substantial modification for rapidly ageing India. (D) Refining the NPS:

(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.

The Way Forward/3
• There is merit in exploring various phased-withdrawal program options. Under such a program, a member retains the annuity component (40 percent) of accumulated balances in a special interest-bearing account, or invests in a senior- citizen- bond. This arrangement does not require an individual to join an insurance pool, but retain the balances under his or her own name. Unlike annuities, balances remaining under such a program when a person dies, can be inherited by the designated nominees.

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The Way Forward/4
• Under the phased withdrawal, there is no insurance pool, so a member retains the ownership of balances and therefore nominees benefit in the event of member’s death. PFRDA should encourage research and policy dialogue on phased withdrawal options appropriate for the NPS. As there is no risk pooling. The trade-off is that as compared to life annuity, longevity risk is inadequately addressed.

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The Way Forward/5
• For India, phased withdrawal option may represent a workable compromise between lump-sum withdrawal and life annuity. This can also benefit micro-pension, and occupational pension plans as they could adapt phased withdrawal plans to suit their requirements and context. The design of the plans should be kept simple, and only limited options should be permitted.

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The Way Forward/6

• 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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The Way Forward/7
(II) Flexible Age of Exit from the NPS: There is a strong

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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The Way Forward/8
This will have several advantages. • First, it will permit individuals to enter NPS even between ages of 55 and 60, and still have sufficient time to accumulate retirement funds. • Second, It will provide flexibility to individuals to choose the macroeconomic conditions, particularly the interest rate conditions, under which to purchase annuities, and participate in the proposed phased withdrawal program. For greater flexibility the age of withdrawal of lump-sum, and the purchase on annuity (and phased withdrawal program) could be separated. Thus, a person could withdraw lump-sum at age 60, but purchase the annuity 48 anytime between 60 and 70 years

The Way Forward/9
• Third, Flexibility in timing of annuity purchases will better enable suppliers of annuities and bonds, such as life insurance companies, to match their assets and liabilities; and help manage uncertainties in longevity trends. • Lastly, as individuals continue to engage in paid economic activities even after formal retirement, such flexibility in the age of exit will enable them to better achieve life-time consumption smoothing.
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The Way Forward/10
(iii) Communication and Financial Literacy Initiatives: A

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. India’s decentralized society is well suited for such partnerships.

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The Way Forward/11
(iv) The NPS Architecture is well-suited for realizing economies of scale (as suggested by the negative relationship between membership size and fees), and economies of scope (as suggested by the use of its architecture for the voluntary NPS available to all citizens). Given the need to economize on the scarce expertise in negotiating CRA contracts and auctioning of investment mandates, the States and other public sector organizations should be encouraged to use the NPS architecture. (v) It is also essential that relatively low life-time administrative costs of the current NPS arrangements be sustained, and in particular distribution costs be 51 minimized.

The Way Forward/12
(vi) Occupational Pension Plans: These plans require approval from the Income Tax Department. But, there appears to be little effective supervision after the approval. So, wide range of practices and lack of good quality and timely statistics. Passing of PFRDA Bill is essential for supervision of occupational plans.

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The Way Forward/13
(E) Social pension schemes such as the Old Age Pensions (OAP) scheme will require greater fiscal resources and better delivery of pensions to the elderly. The fiscal reform and better delivery of government services will therefore be essential. (F) As part of encouraging pension and health economics and overall financial literacy, there is a strong case for expanding the number and quality of post graduate level specialization in social security, particularly, pension economics, actuarial studies, and health policies and management in India.

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The Way Forward/14
(G)There is a case for setting up National Ageing Research Center to better prepare India for coming ageing society. It should however, be very cautious in suggesting inflexible Nation-wide scheme with high reversibility costs. (H) The concept of productive ageing needs to be encouraged. In particular elderly will need to be able to be economically active even after institutional retirement age.

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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