India's old-age crisis

Talking of an old-age crisis in a country where nearly two-thirds of the population are below the age of 30 appears ludicrous, but there is no denying the problem.

Less than a sixth of those about to retire in the next decade are covered by some form of pension, and only 2 per cent of those not working in government (where pensions are generous) will be able to fund their retired lives if they cut expenses by half, according to an all-India survey done by the Invest India Economic Foundation, a think tank that works on the pensions sector.

Apart from the serious social crisis, there's an important fiscal angle to it as well.

For, as a study just done by Gautam Bhardwaj of the IIEF and ex-UTI chief Surendra Dave estimates, providing a pension cover for just the civilian employees of the central and state governments adds up to a whopping 55 per cent of the country's GDP!

To put this in perspective, all the borrowing various governments have been doing over the years to fund the fiscal deficit adds up to around 85 per cent of GDP.

Since neither the central nor state governments have full data on the number of employees (salaries and pensions for lakhs of school teachers, for instance, are paid by the government but since this is done in the form of annual education grants, there is no record of their number), Dave and Bhardwaj rely on the IIEF survey for the number of employees.

Since the central government has started a New Pension Scheme, for employees under which each one will get a pension based on contributions made, as opposed to the earlier government-guaranteed one, the two assume no fresh pension liability on account of new employees.

They then assume that all these employees will retire over the next 35 years, and based on the salary hikes over this period, calculate their salary at retirement.

Since the Life Insurance Corporation sells annuities of Rs 69.9 per year (and 50 per cent to the survivor) on payment of Rs 1,000 today, this is used to calculate what the government will have to provide for each employee at the time of retirement; add this all up, discount it appropriately, and you get a figure of Rs 1,700,000 crore (Rs 17000 billion), which is around 55 per cent of GDP -- that is, if the government has to make a one-time payment to take care of all its pension obligations.

While this itself is frightening, it could be worse since the study's assumptions are way too conservative. The study, for instance, does not take into account other retirement payments like gratuities and leave-encashment benefits -- factor these in, and the debt on account of government pensioners jumps from 55 per cent of GDP to around 70 per cent or so.

The LIC annuity rate used is also incorrect since LIC offers only nominal annuities -- that is, if one gives LIC Rs 1,000 today, one gets Rs 69.9 this year, Rs 69.9 the next, and so on till one dies, and Rs 34.95 to one's spouse till she/he dies, never mind if inflation goes through the roof, making the Rs 34.95 worthless.

But since the government is nice enough to inflation-proof all pensions, clearly what should be used is an inflation-indexed annuity.

While LIC does not offer this, a year ago it offered, for a short while, an annuity of Rs 61.9 based on a 3 per cent indexation -- that is, if you gave LIC Rs 1,000, it promised Rs 61.9 in the first year, and inflated this amount by 3 per cent each year.

So, if inflation was just 3 per cent, you'd get a real pension which would be the same each year. Since inflation is much more than 3 per cent, and even the 3 per cent-indexed annuity increases the cost by around 13 per cent, full inflation-proofing will obviously make the pension debt go up significantly.

The pension estimate also assumes that the pay commission-induced wage increase of bureaucrats will be restricted to just 2 per cent a year (in real terms), which is conservative considering that, over a 35-year period, there will be at least three such commissions given the fact there's one pay commission every decade or thereabouts.

One could go on (the New Pension Scheme for babus, for instance, is not a done deal with just 10-11 states signing on), but the short point is that those who think India's pensions are not a problem, and are delaying pension reforms, are just deluding themselves.

A parting thought: the crisis discussed pertains only to government employees, who comprise just 5-6 per cent of the working population; imagine what would happen if the current defined-benefit pension schemes are extended to everyone the way the Congress and the Left parties want.

The gap on the EPS, around Rs 15,000 crore (Rs 150 billion) a couple of years ago, is already up to Rs 22,000 crore (Rs 220 billion).