In charts: Is raising the retirement age the only way to provide for India’s ageing population?

India will see a sharp slowdown in population growth over the next two decades, which will result in a rise in the number and proportion of older people, especially in the South, the Economic Survey 2019 has predicted. The policy document, released last week, recommends pushing back the retirement age to deal with an ageing population.

How sound is this approach?

For one, India has sharp internal variations in population trends. As statewise projections in the Economic Survey reiterate, South Indian states have already managed to check their population sizes.

The South is ageing differently

The fertility rate is a measure of how many children are likely to be born to a woman belonging to a certain population in her lifetime. The replacement fertility rate is the number of children that would need to be born to a woman in order for the population to which she belongs to exactly replace itself. As per the United Nations Population Division, this replacement rate is 2.1.

The Economic Survey points out that given India’s sex ratio – 943 women for 1,000 men, as per the 2011 census – the replacement fertility rate is likely to be higher, simply because there are fewer women to begin with, and hence they will need to reproduce more. The Survey estimates that an effective replacement level fertility, taking into account the skewed sex ratio, is 2.15-2.2 for India.

As the chart shows, most states have achieved fertility rates below the replacement rate. Unfortunately, the states that haven’t also happen to be among the most populous: Uttar Pradesh and Bihar.

The differential population growth rate also means that the southern states will have fewer working people by 2040, while Uttar Pradesh and Bihar will still be reaping their demographic dividends. That is, they have the potential for higher economic growth while their population is largely working-age, with fewer younger and older people to care for.

The Survey projects that the size of the working-age population will start to decline in 11 out of the 22 major states during 2031-’41. This would lead to migration from states with surplus labour to those with a deficit: something that can already be seen in the southern states. In Kerala, for instance, the high literacy rate means that people have educated themselves out of available blue-collar jobs, leaving those jobs to migrants from north eastern India.

Parallel to the decline in the working-age population would be an increase in the number of people retired from the workforce.

Deferring retirement?

The big policy suggestion the Economic Survey makes for dealing with an increasingly ageing population is to defer the retirement age.

This would affect the southern states, with their older populations, disproportionately.

The Economic Survey claims that raising the retirement age would “help increase female labour force participation in the older age-groups,” ignoring that female labour force participation is dropping in India. It seems unlikely that withholding pensions from older women will cause it to rise.

The Survey also claims raising the retirement age “will be key to the viability of pension systems.” The argument here is that more years of employment would mean fewer years of pension for an individual, reducing the burden on the state which funds pensions.

The Survey bases this recommendation on the experience of other countries like France and Germany where the retirement age is in the process of being raised. What the Survey leaves out however, is that France and Germany provide what is known as a Bismarckian social security system, where citizens have adequate social support to live a respectable and dignified life. The system is financed by a combination of worker, employer and government contributions.

The situation in India is starkly different.

Most schemes for post-retirement years, like the Employee’s Provident Fund, Public Provident Fund and other occupational pension schemes, depend upon working people making a contribution to the fund. This is supplemented by their employer and the government, and paid back to them as a pension once they retire. However, these schemes don’t work for informal workers, and according to the International Labour Organisation, 81% of employment in India is informal.

The only welfare pension scheme run by the central government, which does not require a contribution from working people, is the National Old Age Pension Scheme. It provides Rs 200 per month to those above 60 years and Rs 500 to those above 80 years, who belong to families listed below the poverty line. This amount has remained stagnant for 11 years. Economist Prabhat Patnaik called it “a laughable pittance” in a report published by the non-profit Helpage India and the activist group Pension Parishad in 2018.

Fortunately, since pensions are a subject for the concurrent list, some state governments have supplemented the centre’s contributions. This varies from an additional Rs 200 in Uttar Pradesh and Bihar to Rs 1,800 in Delhi and Kerala.

The current allocation for the National Old Age Pension Scheme under the latest budget is Rs 6259.08 cr, which is 0.03% of the GDP.

A 2013 paper published by IIM Bangalore, written by economists Ayanendu Sanyal and Charan Singh, made the case for a universal pension in India. The authors calculated that if the Indian economy grew by a conservative 6%, all 60-year-olds could receive a pension of Rs 3,000 a month from the Centre, at a cost of 4.7% of the GDP in 2025 and 2.2% of the GDP by 2050.

The 2016-’17 Economic Survey calculated that a Universal Basic Income of Rs 500 a month to every single person, would have cost between 5%-5.7% of the GDP in 2016-’17.

Certainly, the cost of providing a universal pension that older people can live on is not small. It must be noted, however, that these estimates are conservative, and that many 60-year-olds will choose to continue working for a while yet, and that richer citizens will quite likely opt out of the scheme.

Quite apart from the cost though, there is certainly a more principled argument to be made for not forcing older people to work longer years by pushing back the retirement age and withholding pensions from them. People who have contributed to making India one of the fastest growing economies in the world deserve a dignified old age.

Five trillion dollars, but for whom?

The Prime Minister has stated his goal of making India a five-trillion-dollar economy by 2024. India is already the sixth-largest economy in the world, at 2.7 trillion dollars. However, these numbers don’t translate to very much for the ordinary Indian, because inequality in India is only rising. Per an Oxfam report released in January, the country’s top 10% holds 77.4% of the total national wealth.

The British economist John Maynard Keynes predicted back in 1930 that a fifteen-hour work week would be achievable within a century. “All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard,” he wrote.

While his prediction hasn’t yet quite materialised, people in developed countries do, on the whole, work less. A growing economy, better education, increasing industrialisation and higher automation, all ought to mean that people work fewer hours at better jobs, and that they can command the necessities of life, if not all its luxuries. After all, a five trillion dollar economy is meaningless unless it can ultimately provide citizens with the means of living a life of dignity.