| The Union finance minister's announcement of the aam aadmi bima yojana and his intention to deliver universal coverage to the elderly under the National Old Age Pension Scheme (NOAPS) are significant steps towards a broad-based social security for India. |
| However, unless the government is able to streamline delivery mechanisms, such schemes will continue to struggle to confine benefits to the intended population. On the other hand, considering a projected population of over 175 million elderly in the next two decades, India cannot really afford an efficiently delivered universal non-contributory pension. The government should, therefore, adopt a dual approach to tackle the social security challenge. It should gear up the administration to deliver a means-tested old age pension to people who actually need the subsidy. And it should actively encourage potential claimants to the NOAPS to start saving for retirement while they are young. |
| In this context, the 61 million low income informal sector workers who are willing to join a contributory pension scheme should be of interest to policymakers for several reasons""in the 'Invest India Incomes and Savings Survey 2007,' 61 million workers said they would be interested in a contributory pension scheme after the details were explained to them. They constitute 21 per cent of India's total informal sector paid workforce aged between 18 and 59 years. Over half of them are less than 35 years old. They are concentrated across a handful of occupations "" nearly 25 million are farmers or agricultural labourers while 45 per cent are daily wage labourers, street vendors or small shopkeepers. On an average they are willing to save around 7 per cent of their average annual incomes towards retirement (or Rs 9,750 crore per annum in aggregate terms). But they will most certainly be eligible for even a means-tested NOAPS if they do not save for their retirement. (At today's prices, a monthly old-age pension of Rs 400 to these workers will cost Rs 29,640 crore per annum). There is obviously a sound social as well as fiscal argument in favour of a targeted policy intervention on this account. |
| However, despite their high level of interest in pension savings, fewer than 5 per cent of this group are consciously preparing for retirement. In this situation, the government should design some tangible incentives to encourage this workforce to start saving for their old age. Globally, tax incentives have proved an effective public policy tool to encourage voluntary retirement savings. But since none of the workers in this group are taxpayers, a focus on tax breaks will not work. Importantly, due to their modest incomes and savings capacities, many in this group will be unable to accumulate adequate savings even over multiple decades and, hence, will not achieve an above poverty replacement on their own. |
| As a proactive and prudent fiscal and social welfare measure, therefore, the central and individual state governments should consider a system of pension co-contributions for this population. This will provide a powerful financial incentive for these low income workers to undertake voluntary retirement savings over multiple decades. It will also supplement their savings so that the value of their savings is sufficient to keep them above poverty after they stop working. In this, state governments can play an important role in not only supplementing the central government's fiscal contribution but also ensuring front-end efficacy in the local delivery of benefits. |
| Apart from the obvious social policy attractions of this approach, there is an important vertical tax equity issue involved as higher income earners enjoy the benefit of up to Rs 30,000 for annual pension contributions under Section 80C. For these 61 million low-income workers, a pension co-contribution would recognise that such tax benefits are not available to them. |
| Delivering a targeted co-contributions-based old age income security arrangement for this group would also require some form of means testing. However, administering broadly based means-tested co-contributions in India is not a practical option at this time as there are no reliable and comprehensive data that are collected regularly on the individual incomes of potential target populations. Also, traditional service delivery mechanisms may not work as a majority of this population (45.28 million workers or 73.3 per cent of the group) are self-employed and live in rural India. |
| But since a number of these workers are members of micro-finance institutions (MFIs) and cooperatives, the micro-finance and cooperative movements can be harnessed into administering an effective "proxy means test" for pension co-contributions targeting purposes based on their local knowledge of their members' actual incomes. Also, micro-finance institutions are well placed to act as a port for collecting modest pension contributions from members and pooling and transferring them to well regulated financial firms. |
| Importantly, the cost of a pension co-contribution could be very modest compared to a tax-financed old age pension of Rs 400 per month. For example, if a person aged 35 years saved Rs 1,500 per year, she would derive a monthly annuity of around Rs 340. But with a monthly co-contribution of even Rs 100, her monthly pension could jump to Rs 615, or 50 per cent more than the benefit under NOAPS and also above the current poverty line level. Therefore, the government could help to pull a significant population above poverty at retirement with a modest, well-targeted and timely subsidy. |
| The aggregate annual cost of a co-contribution of Rs 100 per month per worker in this group would be Rs 7,410 crore (which is only a quarter of the cost of paying them an old age pension). The central government could put up half of this aggregate co-contribution while the remaining should be paid by individual states based on the state-level distribution of this workforce. While this will impose a modest hit on each state's budget, it would be a giant step in delivering a dignified retirement to 61 million aam aadmis. |
| The writer is director of Invest India Micro Pension Services (IIMPS). This analysis is based on the "Invest India Incomes and Savings Survey 2007" produced by IIMS Dataworks |
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