Pension crisis looms as India’s workers shun sunset savings

MUMBAI: India’s much-vaunted demographic dividend has a weak spot – very few of the nation’s workers are saving for retirement.

That leaves Asia’s third-largest economy sitting on a “ticking pension time bomb”, according to Tarun Ramadorai, author of a report on household finances that was commissioned by the Reserve Bank of India and other financial sector regulators.

“The young, working population is not saving enough,” Ramadorai, who is a professor of financial economics at London’s Imperial College told Bloomberg News in an interview.

“India needs to fix the problem now when the sun is shining. Otherwise, the demograph- ic dividend can become a demographic concern.”

Over the next two decades, India’s young population is expected to spur growth and demand in the US$2 trillion economy. The International Monetary Fund expects India to overtake Germany as the world’s fourth-largest economy in the next five years, with the demographic dividend expected to add up to two percentage points per annum to India’s per capita GDP growth over the next two decades. About a quarter of the projected increase in the global population aged 15-64 years between 2010 and 2040 will occur in India, the IMF says.

The bad news is that only 7.4% of the working age population is covered under a pension programme. That compares with 65% for Germany and 31% for Brazil, another major emerging market economy, according to the World Economic Forum’s report on Global Human Capital.

Part of the reason for the low usage of pension funds is India’s large informal sector and a general lack of a variety of retirement programs in the financial sector. But the Ramadorai committee also found more than 50% of Indian households plan to depend on their children for support during old age, followed by their savings or their business. Less than 10% indicated they would depend on a government-run pension fund or an employee provident fund.

The Ramadorai committee undertook one of the most comprehensive studies of Indian household finances over the past year and submitted its report to the RBI last month. It found 77% of households either do not expect to retire, or have not actively planned for retirement. Instead, a majority expect to rely heavily on help from their children and accumulate debt as they approach retirement age.

That is in sharp contrast to major economies in the world, which tend to deliver a robust security net in old age.