FDs? Grandpa Needs More
Senior citizens number 11 crore in India, and are a challenge and an opportunity
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