A case for universal pension

The Pension Fund Regulatory and Development Authority Bill, 2011, was finally passed by the Parliament, after a delay of nearly a decade. The Bill, an important landmark in the pension history of India, would provide pensioners with a choice of schemes as well as permit foreign direct investment in pension funds. In a welfare state, old age social security remains pivotal, and one of its major components is pension.

Post independence, pension schemes were consolidated and expanded to provide retirement benefits to the entire public sector working population. Further, several provident funds were also set up to extend coverage among the private sector workers and the general public.

Why universal pensions Pension reforms in India in the past decade have seen three major initiatives — a paradigmatic shift in the civil servants’ pension scheme in 2004, the introduction of National Pension Scheme (NPS) for all citizens, and the initiation of NPS-Lite for the economically disadvantaged sections with smaller savings. But all these schemes are contributory, and given the prevailing economic situation and lack of financial awareness, the coverage is low, estimated at less than 120 million persons.

To increase pension penetration, the government could consider Universal Pension (UPS) — a benefit which is received by citizen once they reach the stipulated age.

In its simplest form, the character of this type of pension is flat benefits with no means (e.g. income or asset, participation in the labour force, retirement from paid employment) test. Universal pensions are the easiest to administer, and have very low administrative costs in comparison to the other schemes.

A number of countries such as the Netherlands and Norway provide a universal basic pension that is tax-financed. South Africa, Australia, Brazil, Lesotho and Chile have pension schemes which exclude only a few.

Mauritius, Namibia, Botswana, Bolivia, Nepal, Samoa, Brunei, Kosovo and Mexico City provide a basic universal pension to the elderly, simply based on citizenship, residence and age.

If India was to consider a similar proposal, what would be the fiscal implication? An attempt has been made to estimate the fiscal cost of implementing a universal pension scheme in India where all Indians of the qualifying age and above will receive pension.

The estimates are based on the following assumptions: GDP records a real growth rate of 4, 5, and 6 per cent, since the annual average growth rate from 1950-51 to 2012-13 is 4.9 per cent; b) qualifying age is taken to be 60 years; c) future population of India has been calculated from the data set maintained by the United Nations; and d) pension estimates are made for 2015, 2025 and 2050 e) pension amount per month is assumed to be ₹500, ₹1,000 and ₹1,500.

The implementation of the UPS would entail a nominal additional expenditure of 1 per cent of GDP in 2015 if the economy grows at 5 per cent per annum, assuming that the pension amount is ₹500 per month.

Funding issues In contrast, the existing pension liability of civil servants was about 2.6 per cent of GDP in 2012-13, of which pension bill of the Central Government constituted about 0.9 per cent of GDP and that of the State governments about 1.7 per cent of GDP.

Funding remains a major problem in the case of universal pension as the pension expenditure is already high. Nevertheless, since the welfare aspects involve the entire population, an additional burden can easily be comprehended.

On the other hand, like Mauritius and New Zealand, a part of pension can be recovered from pensioners who continue to work or have investment income (rich pensioners) simply by making the non-contributory pension taxable.

India has had an elaborate pension system for more than a century but nearly 80 per cent of the working population is not entitled to any pension. The elderly are not only productive but also serve as an anchor for many dependent children. By design UPS provides social protection which remains unattainable through contributory pensions. An introduction of this scheme will therefore enhance the welfare of the working cohorts of India’s majority.

(Sanyal is Assistant Professor of Economics, St Joseph's College, Bangalore. Singh is RBI Chair Professor of Economics, IIM Bangalore.The views are personal)