Ideal micro-pension plan vital

Social Security Cover

By Moin Qazi

Notwithstanding the Government’s bold step in enlarging the social security cover for low income households, through the mega pension scheme – Pradhan Mantri Shram Yogi Mandhan – the pension system of the country has to evolve quickly, or else the economy will be left in a dire state.
Though the Scheme offers an assured pension of ?3000 per month to nearly 10 crore people working in largely fragmented informal sector and will cover domestic workers, beedi workers, and small shop workers among other, there are mounting challenges.
Of the total 500 million workforce, over 90% are unorganised workers who were till now deprived of not just minimum wages but also any kind of social security, be it pensions or health insurance. Those earning above Rs 15,000 are covered under the Employees’ Provident Fund Organisation or the Employees’ State Insurance Corporation.
India is experiencing a demographic transition leading to lower fertility, increased life expectancy, and a consequent increase in the proportion of the elderly. Families are shrinking and transforming into nuclear units. Individualistic attitudes and rising aspirations with the accompanying changes in lifestyles are widening the generation gap. According to the India Human Development Survey (IHDS) of the National Council of Applied Economic Research (NCAER), 45 per cent of elderly males and 75 per cent of elderly females are currently fully dependent on others.
India’s ageing population is expected to grow at more than double the rate of the general population According to Census 2011; India has 10.8 million senior citizens (above 60 years of age). This number is expected to increase substantially in the coming years with a rise in the life expectancy to 65 years from 42 years in1960. In fact it is predicted that between the years 2000 and 2050, the population of India will grow by 55 per cent. However, the population above 60 years and 80 years will grow by 326 per cent and 700 per cent respectively.
According to the NABARD All India Rural Financial Inclusion Survey (NAFIS) 2016-17, 18.9 per cent households reported receiving one or the other kind of pension, of these 32 per cent households reported at least one member above the age of 60 receiving pension. Only 4 per cent households were covered under widow pension, 2 per cent retirement pension and 1.5 per cent under disability pension.
With a breakdown of the joint family, support in old age, rising life expectancy, negligible lifetime savings and pension exclusion, the elderly face the grim prospect of living in poverty after they are too old to work. Women are further disadvantaged due to lower incomes, a relatively higher life expectancy than men, frequent employment interruptions at a younger orking age and lower access to formal finance.
There is an immediate need for a reliable and convenient pension scheme. A pension is a financial tool that is generally defined as a long-term voluntary savings plan by an individual during his working life to yield returns living post-retirement to enable her/him to maintain a decent standard of living. In the scheme announced those joining it at 18 years will pay ?55 per month and ?100 if joining at the age of 29. The pension will be paid once they reached the age of 60. The current minimum pension for the organised workers stands at Rs 1,000 per month.
For the poor and vulnerable, two types of pension could be provided. The first is a public or social pension, where the State raises the revenue and redistributes to the citizens when they reach a stipulated age, in order to guarantee them a dignified life. The second is a personal retirement savings plan. People save a small part of their income individually during their working life that is invested collectively to generate periodical returns. When people retire, their accumulated capital is paid out in monthly amounts. The first one has issues of viability. A possible solution could be a universal social pension with a fairly high retirement age so that expenditure is contained.
The daily wage workers live on a day-to-day basis and as a result, their immediate financial needs take priority over their future needs. They are not able to plan for their long-term future and as a result, they have to work through their entire life. At the national level, they are not covered under any pension suitable to them. Neither their own financial attitude nor any formal financial scheme or State safety nets enable them to secure their old age years.
Though informal sector workers may not “retire” in the formal sense like employees in the organised sector, they do need to prepare for the eventual reduction in earning capacity that will occur during old age, especially on account of ill health. Micro-pension, therefore, aims to provide an income stream to coincide with this decline in earning capacity.
There are numerous government-supported micro-pension schemes, but also several mounting challenges. There is reluctance of people towards investing any part of their income over a large period of time, an absence of regular income for clients, poor infrastructure/connectivity and remotely spread clientele. The Indian government doesn’t seem to have much appetite for social protection programmes and its efforts in evolving a relevant pension model have been patchy.
Micro-pension has low-ticket, high-volume transactions which make it unviable. With a small corpus, high transaction costs and wafer-thin margins (or even losses), the viability of micro-pension is a big issue. Another challenge is getting the agents to sell the scheme, as commissions are small. Premature withdrawal and closure are also a serious problem.
For micro-pensions to succeed, a delicate balance between economic viability, generation of adequate returns and customised features for the participants is required. As the income flow of low-income communities is uncertain or volatile, they should be offered a degree of financial flexibility providing for low or no minimum contribution requirements in order to encourage membership.
However, contributions that are set too low or which are paid very unevenly may not provide sufficient income security. Experience with savings-based pension plans indicates that low-income groups prefer lower-value and frequent deposits rather than infrequent larger-value deposits. As there are competing demands on their resources, it is difficult for them to accumulate large amounts. In order to facilitate the making of frequent deposits, convenient door-to-door deposit collection has to be organised. Mobile phones have transformed the landscape in a revolutionary way and this may not be such a tall order.
An ideal micro-pension plan needs to address governance, design, administrative and efficiency issues to succeed and requires multi-model implementation in addition to a separate set of regulations on account of the complex nature of the Indian employment profile.—INFA