Can universal pension scheme work?

Last Updated 26 June 2012, 17:32 IST

A publicly-funded old age pension scheme is a policy measure for social protection in India. Being in the Concurrent List of the Constitution, old age pension schemes are designed and implemented by the Union and state governments with diversity in age limits, exclusions criteria and pension amounts.

For instance, the Indira Gandhi National Old Age Pension Scheme (IGNOAPS) provides a monetary assistance of Rs 200 (or Rs 500) per month for individuals in age group 65-80 (or 80+) and below-the-poverty line (BPL) family.

The Karnataka government’s old age pension scheme (called Sandhya Suraksha) provides a supplementary financial assistance of Rs 300 for beneficiaries of the IGNOPS in the age group 65-80. A more generous supplementary pension schemes are implemented by states, such as, Delhi, Goa and Chandigarh. Further, unlike Andhra Pradesh, Himachal Pradesh, Madhya Pradesh and Orissa, Karnataka does not provide old age pension for the eligible elderly in the age group 60-64. Consequently, India’s current targeted, public-funded and non-contributory old age pension schemes are characterised by non-universality and means-related.

Expected beneficiaries

Most recently, the Pension Parishad has demanded a universal, publicly funded, non-contributory, non-means related and non-contributory old age pension to all informal/ unorganised workers with a minimum uniform amount of Rs 2,000 (or not less than 50 per cent of official minimum wages or whichever is higher) per person per month in the pensionable ages (65+). About 100 million are expected beneficiaries of this proposed scheme. The number of expected beneficiaries is reduced to 80 million, if the income-tax payers are excluded and the benefit is extended to all at 60+.
In contrast, the current estimated number of beneficiaries of the IGNOAPS is less than 16.5 million. At the minimum, the current total cost of this scheme is Rs 330 crore, about 0.03 per cent actual revenue expenditure of the Central government in 2010-11. Apparently, other things being the same, this expenditure would have been 60 times higher for 100 million persons if the proposed pension amount by the Pension Parishad were to be implemented. 

About 488 million workers, or 94 per cent of India’s labour force, are engaged in informal/unorganised works. This includes workers and self-employed in agriculture, manufacturing and services. There is no formal age of retirement in informal jobs and, in general, they are continued beyond 60 years. In addition, some retired government and corporate sector workers in the organised may work after their official retirement. All these elderly workers contribute to national income by their labour income.  They pay indirect (or consumption) taxes.

The results are new and interesting. Labour income of elderly population contributes to India’s GDP by 1.08 per cent.  Proposed universal old age pension scheme costs 3.16 per cent of GDP. Most surprisingly, elderly individuals pay both direct (about 24 per cent) and indirect taxes (about 9 per cent).  

Demand for universal old age pension scheme is misunderstood to be entirely financed by taxing the working adults. The results of the NTA methodology clears this misunderstanding in the minds of policy makers and adult tax payers by providing estimates of the valuable economic contribution of India’s elderly population towards labour income and taxes.

India’s demography is characterised by remarkable inter-state differences in size and growth of elderly population. The policy framework of National Transfer Accounts need to be constructed at the state level to capture the impact of these differences on cost and financing options of introducing either supplementary or new  state level old age pension schemes.

Karnataka state may consider this construction as a policy objective for its 12th Five Year Plan (2012-17), because the elderly population is projected to reach about 14 million or 20 per cent of total population by 2017 with an annual average growth rate of 3.32 per cent. If successful, Karnataka may become a policy leader to forecast and analyze long run financial implications of state level old age demographic changes in national and global perspectives.  

(The writer is a professor of economics at the Institute for Social and Economic Change)

(Published 26 June 2012, 17:32 IST)

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