Micropension: Providing financial security for the elderly poor

India is home to one-fifth of the world’s population which includes a third of the world’s poor and one-eighth of the world’s elderly. Several million of them who spend their whole lives as informal workers have no retirement security other than the hope that their children will care for them in their old age. This arrangement worked well till the joint family structure was the dominant characteristic of Indian society. However, with new social norms eroding the family-based system of support, old age care for low-income citizens has become a critical challenge.

India is experiencing a demographic transition to grey-hairs which is likely to see a further uptick. This is leading to lower fertility, increased life expectancy, and a consequent increase in the proportion of the elderly in the population. 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 India Human Development Survey of the National Council of Applied Economic Research, 45 per cent of elderly males and 75 per cent of elderly females are currently fully dependent on others for sustenance. India’s ageing population is expected to grow at more than double the rate of the general population. The UN Population Division estimates that by 2050, India will have 21.16 per cent of the population above the age of 60 as compared to 60.34 per cent aged between 15 and 59 years.

With a breakdown of joint family support in old age rising life expectancy, negligible lifetime savings, pension exclusion and 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 a shorter working age, and lower access to formal finance.

The main issues that characterise old age security are:

• Traditional systems of inter-generational care are either breaking down or are no longer perceived as reliable
• Assets, especially land and property, are seen as the best way to guarantee old-age security but seem to be out of reach for many poor people.
• Poor people usually have a low estimate of and little experience with their capacity to use savings as a route to old-age security.

There is an immediate need for a reliable and convenient pension programme to address the old age problems of the poor. 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.

There are three broad types of pension products available in the world:

• First pillar: Social security schemes
• Second pillar: Occupational pension schemes
• Third pillar: Individual private pension

For the poor and vulnerable, two types of pension could be provided. The first is a public or social pension, where the state raises revenue and redistributes to citizens when they reach a stipulated age in order to guarantee them a dignified life. The second is micro-pension, 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 future needs. They are not able to plan for their future and as a result, they have to work till they die. 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’s safety nets enable them to secure old age or provide them old-age security.

Though informal sector workers may not “retire” in the formal sense like employees in the organised sector, they 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.

Several studies have established that India has a very young and immature pension industry and a population that is not particularly keen to secure its retirement. A mere 7.4 per cent of the total Indian population is covered under any form of pension plans, which is an alarming figure. India spends 1.45 per cent of its GDP on social protection, among the lowest in Asia, far lower than China, Sri Lanka, Thailand and even Nepal.

The well-known microfinance expert Stuart Rutherford succinctly sums up the dilemma of the poor when it comes to micropension: “Poor people understand the purpose and value of saving. They sense that there may be a savings route to old-age security, and grab opportunities when they come their way. But they are beset by many difficulties, both in their own circumstances and in the financial services available to them, so that in practice success remains the exception rather than the rule.”

The pension system has to evolve quickly, particularly in a country like India or else the economy will be left in a dire state. There are several mounting challenges: the 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 and connectivity and remote spread of clientele.

Micropension has low-ticket high-volume transactions which makes 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 agents to sell it 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. To determine how the long-term saving products might help solve the problem of old-age income security, an improved understanding of the behavioural, economic and institutional barriers to participation are required. As the flow of income of low-income communities is uncertain or volatile owing to the nature of their economy, they should be offered a degree of financial flexibility providing for low or no minimum contribution requirements in order to encourage membership. Experience with micro-savings 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, convenience and accessibility are a prime requirement. Mobile phones have transformed the landscape in a revolutionary way and this may not be a tall order.

An ideal micro-pension programme needs to address governance, design, administrative and efficiency issues to succeed and requires a multi-model implementation of micro-pension plans in addition to a separate set of regulations.

The writer is a well-known banker, author and Islamic researcher. He can be reached at moinqazi123@gmail.com