FDs? Grandpa Needs More

Se­nior ci­ti­zens num­ber 11 crore in In­dia, and are a chal­lenge and an op­por­tu­nity

The Economic Times - - The Edit Page - T K Arun

In­dia is a young coun­try, 50% of the pop­u­la­tion is be­low 25 years of age and 65% are be­low 35. But 8.6% of In­di­ans are above 60, ac­cord­ing to the 2011Cen­sus. That works out to over 110 mil­lion peo­ple to­day. Should the daz­zle of the an­tic­i­pated de­mo­graphic div­i­dend blind us to the plight of this large and grow­ing group?

They are not a very ed­u­cated lot. Lit­er­acy among the 60-plus is 44%, up from 27% in1991. Once you hit 60, you can ex­pect to live on for al­most18 more years, on av­er­age.

How should they fend for them­selves? Looked af­ter by their chil­dren, even as they look af­ter their chil­dren’s chil­dren? Or by means of the re­turns on their own sav­ings, sup­ple­mented, if needed, by state pen­sions?

Old, Not De­crepit

These are not, of course, mu­tu­ally ex­clu­sive op­tions. The sons who aban­don their wid­owed moth­ers at Vrin­da­van or lose their pi­ous par­ents at the Kumbh Mela are a mi­nor­ity. Most peo­ple would like to look af­ter their par­ents. Par­ents pro­vide an in­cen­tive as well, pos­sess­ing as­sets that could pass on to their chil­dren.

But this does not work out, as the pop­u­la­tion be­comes in­creas­ingly mo­bile, peo­ple mi­grat­ing within and without the coun­try.

In­dia did a smart thing by set­ting up the Na­tional Pen­sion Sys­tem. The NPS re­places, for those who joined the civil ser­vice af­ter De­cem­ber 31, 2003, the pay-as-you-go pen­sions that ear­lier batches of civil ser­vants get. This lat­ter kind of pen­sions be­come un­af­ford­able when pop­u­la­tions age, the pro­por­tion of those who work and pay taxes falls.

Younger civil ser­vants make de­fined con­tri­bu­tions, 20% of their salary, to the NPS. Un­civil ser­vants and or­di­nary mor­tals can be­come vol­un­tary sub­scribers to the NPS. Their sav­ings are in­vested by pro­fes­sional fund man­agers in dif­fer­ent as­set classes, to earn re­turns that grow the cor­pus. When they re­tire, the cor­pus can be used to buy an­nu­ities or other as­sets yield­ing an in­come stream.

Right now, the tax treat­ment of the cor­pus is fid­dly. While the ac­cu­mu­la­tions in the Em­ploy­ees’ Prov­i­dent Fund (EPS) are ex­empt from tax al­to­gether on ma­tu­rity, only a pro­por­tion of NPS with­drawals are tax-ex­empt. The mar­ket for an­nu­ities is far from per­fect. Peo­ple might pre­fer to buy a home and live off its rental in­come or the in­come stream pro­duced by re­verse-mort­gag­ing it, than by buy­ing a sub­op­ti­mal an­nu­ity scheme. There is no point in de­priv­ing them of this choice.

What is beyond dis­pute is that the favourite sav­ing in­stru­ment of the In­dian se­nior cit­i­zen, the bank fixed de­posit (FD), is no longer at­trac­tive. As In­dia moves to a low-in­fla­tion, low­in­ter­est rate regime, bank de­posits would strug­gle to of­fer a rate of re­turn higher than the rate of in­fla­tion.

Sav­ings gen­er­ate a re­turn be­cause some­one in­vests them, mean­ing, de­ploys them to ac­quire some claim or the other on the econ­omy’s pro­duc­tive ca­pac­ity. Eq­uity yields di­rect own­er­ship of firms, of­fer­ing high re­turns and the risk of to­tal loss, if the firm goes bust. Debt is safer, but of­fers lower re­turns. Real es­tate in­vest­ment trusts hold out rental in­comes.

Ideally, sav­ings should get de­ployed in di­verse as­sets, to mit­i­gate risks. Since most or­di­nary savers do not have the ex­per­tise to choose as­set classes and as­sets, it is safer to en­trust the sav­ings to pro­fes­sional fund man­agers. Mu­tual funds are a good bet. But they have costly fund man­age­ment fees, apart from other costs.

Give Them NPS Tier 2

The cheap­est ac­cess to di­verse as­set classes, pro­fes­sional fund man­agers and an elec­tronic ac­count in which to hold as­sets is via a vol­un­tary sub­scrip­tion to the NPS. The NPS has a Tier 1 ac­count, which locks up sav­ings till you reach 60. Any­one with a Tier 1 ac­count can have a Tier 2 ac­count, from which funds can be with­drawn at short no­tice, al­most like from a bank ac­count.

The gov­ern­ment should open up ac­cess to the NPS Tier 2 ac­counts for se­nior ci­ti­zens who, by virtue of be­ing over 60, are not el­i­gi­ble to have a Tier 1 ac­count, and are thus, at present, not el­i­gi­ble for a Tier 2 ac­count ei­ther. Through this, se­niors who are con­founded by the fall­ing rates on FDs and small sav­ings schemes, can ac­quire easy, low-cost, re­li­able and por­ta­ble ac­cess to di­verse forms of claims on the pro­duc­tive ca­pac­ity of the In­dian econ­omy.

Se­niors re­quire spe­cial kinds of health in­sur­ance. If care is as­sured in case of de­bil­i­tat­ing crit­i­cal ill­ness, they can be in­cen­tivised to spend their pen­sions, in­stead of squir­relling them away. This would be good for the econ­omy, par­tic­u­larly in tourism and other re­cre­ation, be­sides for their qual­ity of life.

Their ex­per­tise and ex­pe­ri­ence, when shared with teams of younger work­ers, could boost eco­nomic pro­duc­tiv­ity. The chal­lenge here is how to or­gan­ise and de­ploy such teams.

Who will look af­ter the aged, if their chil­dren are far away? Stuff­ing them in old-age homes is an op­tion in­fe­rior to young volunteers look­ing them up once a day at their own homes. The volunteers could notch up so­cial cred­its they can re­deem for col­lege ad­mis­sions, their own pen­sions. Or po­lit­i­cal volunteers could hope to con­vert sys­tem­atic com­pas­sion into votes.

Old age calls for cre­ative de­bate.

The Age of Golden Age­ing

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.