India’s much-vaunted demographic dividend has a weak spot -- very few of the nation’s workers are saving for retirement.
That leaves Asia’s third-largest economy sitting on a "ticking pension time bomb", according to Tarun Ramadorai, author of a report on household finances that was commissioned by the Reserve Bank of India and other financial sector regulators.
"The young, working population is not saving enough," Ramadorai, who is a professor of financial economics at London’s Imperial College told Bloomberg News in an interview. "India needs to fix the problem now when the sun is shining. Otherwise, the demographic dividend can become a demographic concern."
Over the next two decades, India’s young population is expected to spur growth and demand in the $2 trillion economy. The International Monetary Fund expects India to overtake Germany as the world’s fourth-largest economy in the next five years, with the demographic dividend expected to add up to 2 percentage points per annum to India’s per capita GDP growth over the next two decades. About a quarter of the projected increase in the global population aged 15–64 years between 2010 and 2040 will occur in India, the IMF says.
The bad news is that only 7.4 percent of the working age population is covered under a pension program. That compares with 65 percent for Germany and 31 percent for Brazil, another major emerging market economy, according to the World Economic Forum’s report on Global Human Capital.
Part of the reason for the low usage of pension funds is India’s large informal sector and a general lack of a variety of retirement programs in the financial sector. But the Ramadorai committee also found more than 50 percent of Indian households plan to depend on their children for support during old age, followed by their savings or their business. Less than 10 percent indicated they would depend on a government-run pension fund or an employee provident fund.
The Ramadorai committee undertook one of the most comprehensive studies of Indian household finances over the past year and submitted its report to the RBI last month. It found 77 percent of households either do not expect to retire, or have not actively planned for retirement. Instead, a majority expect to rely heavily on help from their children and accumulate debt as they approach retirement age.
That is in sharp contrast to major economies in the world, which tend to deliver a robust security net in old age. Compared to the U.K., where private pension investments make up more than 95 percent of GDP, in India it is less than 1 percent, according to a 2016 pension markets report by the OECD.
So poor are some of the retirement funds that India is usually found at, or near, the bottom of the Melbourne Mercer Global Pension Index that ranks some 25 countries according to the overall quality of the pension systems.
And unless the government does more to encourage the pension sector, the burden is likely to stretch its finances and push the budget deficit higher, experts say.
Crisil Research, an independent research house, in a 2015 report said if pension coverage remains low at current levels, by 2030 the government will have to come up with a program to support the entire old age population, raising its fiscal burden to as high as 4.1 percent of GDP.
Ramadorai also said Indians’ love for gold is unlikely to diminish in the near future. According to his report, average Indian households hold 11 percent of their wealth in gold, compared to just 0.4 percent for China.
"It is used as an inflation hedge, an easy collateral to get a loan and generally bought because one is uncertain about the economy and future," he said. "It is also used to evade taxes, so we are proposing among other things, changes like linking purchase of gold to citizens’ tax identity numbers and setting up of an exchange."
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