Taking pensions to the hinterland

A tiny elite of 11 per cent of the total population of India is covered by a formal pension scheme. It engineers debates over pension reform, unmindful of the needs of the majority. The majority, it assumes, does not save and is not well-informed enough to matter. The elite should know that the New Pension System (NPS) is an important attempt at increasing coverage. Many people are sceptical about the extent to which the NPS can be useful to the vast number of people who are not covered by today's pension schemes. They seem to believe that those who are not covered by pensions are illiterate farm workers with negligible savings and abject ignorance.

Now we know better. The recently released Indian Retirement Earnings and Savings (IRES) database, produced by ORG-AC Nielsen at the instance of the ministry of finance, has information on 42,000 randomly sampled households in India. The data provides insights into the uncovered sector - the group of earners in the country who belong to no pension system. The trends that emerge from this database shatter many myths about the uncovered sector. The uncovered sector is believed to cons-titute landless and daily wage labourers.

However, traditional farmers constitute 21 per cent of the uncovered sector, followed by agricultural labour at 14 per cent and mechanised farmers, who're 2 per cent of those not covered by any scheme. Then there are wage labourers: Skilled (11 per cent) as well as unskilled (15 per cent). The self-employed are a large group, making up 38 per cent of the uncovered sector. Big chunks of this include traders with fixed premises (16 per cent), traders without fixed premises (5 per cent), self-employed professionals (1 per cent) and home-based workers (3 per cent). The uncovered sector was assumed to be very poor, with barely enough income to meet daily consumption needs. In fact, the average income of earners in the uncovered sector is Rs 51,820 per year. The average income of traditional farmers is Rs 51,660 per year and that of farmers engaged in mechanised farming Rs 1,27,000 per year. With no income, it is assumed that there is hardly any ability to save. However, the survey found the savings of the average earner in the uncovered sector to be Rs 9,500 per year. Just 6 per cent of this group has negative savings.

Even if there are some savings, is there any ability to save additionally for old age? About 36 per cent of earners can save at least Rs 6 a day and 23 per cent at least Rs 10 a day. At first sight, these amounts might look small. But it is expected that the NPS could be effective at capturing such small contributions and bringing these people into the pension system. Using a modern pension system, it is possible to stave off poverty by using contributions like Rs 6 to Rs 10 per day.

It might be simplistic to imagine that the few people who can save are in urban areas whereas the real India is rural and its people will be left out. However, the occupational structure of India is now a roughly 50:50 distribution between urban and rural. What is true is that the larger percentage of the formal sector lives in urban India. In the uncovered sector, 52 per cent of those in urban India have an income greater than the average of Rs 51,820 per year. For rural India, the figure is 43 per cent - which is not that far behind. The uncovered sector, it is presumed, is largely illiterate and cannot decide where to save. However, only 27 per cent of the uncovered sector is illiterate - 14 per cent have been through primary school, 19 per cent have cleared middle school and 18 per cent have passed high school. About 5 per cent of the uncovered are graduates.

It is a myth to believe that the uncovered sector works till death and, therefore, does not require "old-age income security". On an average, people in the uncovered sector expect to withdraw from the labour market when they turn 62. They are expected to live for an average of 15 years after retirement. This highlights the importance of building up savings in the working years, so as to finance consumption in old age. Does gold constitute a major part of savings of the uncovered sector? Not really. Only 18 per cent of the uncovered sector has bought gold. But a lot of gold is inherited and not bought. Still, only 33 per cent believe that it is a major part of their savings portfolio.

People in the uncovered sector are confident that their children will take care of them in old age. While most people do expect care from children in old age, only 45 per cent are confident that their children will take care of them. As many as 61 per cent of the uncovered sector is keen to participate in the NPS. This holds even as the respondent is told that the NPS will not allow early withdrawals and will not have government subsidies or guarantees. Any more misgivings?

The writer is an economist at the Indian Pension Research Foundation.

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