An ideal micro-pension programme must address administrative, governance, design and efficiency issues to succeed. For it to work, a delicate balance between economic viability, generation of adequate returns and customised features for participants is a must
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. Most of them spend their entire lives as informal workers and have no retirement security other than hopes that their children will take care for them in their old age. This arrangement worked well as long as the joint family structure was the dominant characteristic of the 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. With underdeveloped annuity markets and poor financial literacy, these people face considerable challenges in planning their retirement security. Many elderly citizens are stuck with lives of never-ending work — a fate that may befall millions in the coming decades. We can see a miserable preview for those who don’t have pensions that previous generations enjoyed.
India is experiencing a demographic transition — 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 accompanying changes in lifestyles are widening the generation gap.
Social security is defined by the International Labour Organisation (ILO) as “the protection which society provides for its members, through a series of public measures to prevent the social and economic distress that would otherwise be caused by the stoppage or substantial reduction in earnings resulting from sickness, maternity, employment injury, unemployment, invalidity, old age and death; the provision of medical care and the provision of subsidies for families with children.” (ILO, 1942) .
Micro-pensions are financial products for old age income security, targeted at people in the informal sector and other low-income groups, who have varying and unstable income and are often financially illiterate, thus having limited access to financial services. They are a powerful solution to insulate low-income earners against old-age poverty and provide them with the possibility to build a better, independent and dignified financial future.
According to NABARD’s All India Rural Financial Inclusion Survey 2016-17, 18.9 per cent households reported receiving one or the other kind of pension. Of these, 32 per cent reported at least one member above the age of 60 receiving old pension. Only four per cent were covered under the widow pension, two per cent retirement pension and 1.5 per cent under disability 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 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 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.
IGNOAPS also called as National Old Age Pension Scheme (renamed as Indira Gandhi National Old Age Pension Scheme (IGNOAPS) in 2007), which is targeted at the destitute elderly, was launched by the Union Government on August 15, 1995. From April 2011, the eligibility age for this scheme was reduced from 65 to 60 and the pension amount was raised from Rs 75 to Rs 200 per month for elderly persons in the age group 60-79 years and Rs 500 for those above 80. The entire funding for this scheme is disbursed by the Union Government to the States and the cover is limited to 50 per cent of the BPL population above age 65 (now 60). Currently, the Union Government spends Rs 6,564 crore or 0.04 per cent of the GDP on this flagship social security programme.,
The Indira Gandhi National Widow Pension Scheme (IGNWPS), introduced in 2009, provides BPL widows in the age group of 40-64 (later revised as 40-59) with a monthly pension of Rs 200 per beneficiary. After they attain the age of 60, they qualify for pension under IGNOAPS.
The Annapurna scheme, launched in 2000, provides food security (35kg. food grains per month free of cost) to senior citizens not covered under IGNOAPS. As per the National Food Security Act, 2013, every person belonging to priority households shall be entitled to receive five kilograms of food grains per person, per month at subsidised prices under the Targeted Public Distribution System.
As many as 14 States provide a monthly pension of Rs 500 per person or less to the elderly, as per the State of Pensions in India Report 2018, which was released recently at the Press Club of India. As per the report, Mizoram and Madhya Pradesh give pensions as low as Rs 250 and Rs 300 a month, per person. Of the 80 million elderly entitled to a pension of Rs 200 per month, this meagre amount by the Union Government reaches just 22.3 million people… leaving out 58 million people with no pension or any other form of assistance.”
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 till they die .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.
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, 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. However, contributions that are set too low or which are paid very unevenly may not provide sufficient income security. 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.
(The writer is Member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women)
