With life expectancy going up, the post-retirement phase has become long and arduous in the absence of an effective social security system, and with decline of the joint family system. In this situation, the Government must provide larger tax advantages to those in the 50-plus age group that would be facing retirement.
This is that time of the year when everyone offers advice to the Finance Minster. Everyone talks of Gen X (born in the 1980s) and Gen Y (born in the 1990s) and baby boomers (born in the 1960s); perhaps, it is time to look at the travails of Gen A (Generation Aged), that is, those born before the 1950s.
The country’s population is expected to rise by 49 per cent between 1991and 2016 and the number of elderly persons (65 and above) to increase to 78 million. The share of aged (above 65) in the total population will rise to 116 million (8 per cent) by 2026. Those at age 60 today are expected to live beyond 75 years. Thus, on an average, an Indian worker needs to have adequate resources to support himself for at least 15 years after retirement.
The Table gives the projections by the office of the Registrar-General of India. The population above 65 is expected to be nearly 5 per cent by 2006, reaching 8 per cent by 2026. According to the 2001 Census, the number of persons above 65 years has reached 4 per cent. This indicates that a substantial portion of the elderly need to be taken care of even now.
The services sector, consisting of construction, transport, communication and trade, finance, insurance and real-estate, community, social and personal services accounts for nearly 60 per cent of the share of the economy in 2005. In other words, the service sector is playing a substantial role (around half of the national income) in the economy. Most of these activities are undertaken by self-employed persons not covered by any social security schemes.
As per the 2001 Census, the total workforce was 403 million strong, 311 million rural and 92 million urban. Of the 403 million, 168 million were non-agricultural workers including 16 million industrial workers. There were 235 million agriculture related workers, including 128 million cultivators. Neither the agricultural nor the non-industrial workers have social security cover of any significance.
The government pension system covers only those employed by the Central and State governments and the mandatory system that is, Employees Provident Fund and Employees Pension Schemes (EPF and EPS) covers only 41 million with a cumulative assets of Rs 1.9 trillion as of March 2005 (Annual Report of EPFO). The mandatory schemes cover no more than 15 per cent of the working population.
Tradition and Change
In the context of the decline of the joint family system, this poses difficult choices for the elderly. This is a very important area that policy planners need to focus on. Caring for the aged is part of the Indian tradition. In the past, rich merchants and other donors would construct “Old Age Homes” in the vicinity of pilgrimage centres where the aged could spend their time in spiritual pursuits.
Unfortunately, all that has changed in a country that has around one-eighth of the world’s aged population.
Most of them are not covered by a pension system, and have to rely on family arrangements or their own earnings. But with globalisation, the joint family system is on the decline at least in the urban areas and to that extent the challenge of caring for the aged has become greater for society and government.
The traditional and informal methods of old age income security are inadequate in the light of the increased life-span and enhanced medical expenses in old age. There is, thus, a pressing need to re-examine the formal and informal systems available to tackle the challenge of the “Age Quake”.
What the govt can do
The Government can provide larger tax advantages to the people in the 50-plus age group compared to the younger set in pension deductions. For instance, the Government can think of giving tax exemption up to Rs 5 lakh exclusively for pension savings to the 50-plus group. The suggestion here is that a constant deduction across all age groups needs to be re-looked at in the context of the tectonic changes taking place in the social system and the ability of the elderly to cope with them. Perhaps, after a decade this can be revised or reversed.
India has perhaps the world’s largest savings in the form of gold ornaments and pension funds can be encouraged to take single premium in the form of gold and for that suitable monetary tax exemption can be given. This would put to productive use the stock of gold that is available with the middle-class but not used at all.
A major asset for the elderly is a house or building or a piece of real-estate. Data provided by the National Sample Survey (59th Round) on Household Assets and Liabilities provide clues to the importance of housing equity. An analysis of the data by MPCE (household monthly per capita expenditure) shows that urban middle-class households hold up to 67 per cent of their wealth in the form of housing equity. In the rural areas, about 63 per cent of the elderly had some property, whereas the corresponding figure for urban areas was 58 per cent. Most households tend to over-invest in housing equity because it is both a durable (investment) as well as consumption good (`shelter needs’ that have an outflow of imputed rent).
The life-cycle hypothesis of saving suggests that asset accumulation happens during the early stages when there is an income flow, and during the later years the elderly `live off’ the accumulated assets. But by its very nature housing cannot be divided into its investment and the consumption components. The elderly would like to de-accumulate the investment component, even while retaining the consumption component, by living in the house. Given the reluctance of the elderly to sell real-estate and the high volatility of prices, one instrument that can aid senior citizens is the reverse mortgage.
This instrument allows elderly homeowners to borrow against the home-equity without moving out of or selling the asset. Reverse mortgages were designed for the elderly, who are `house-rich’ but `cash-poor’, whereby they can liquidate a portion or the whole of their home equity over a period to create a regular stream of income. Reverse mortgages are popular in the US, Canada and Australia.
In the Budget, the Finance Minister should give a big boost to reverse mortgage by completely exempting the income stream from tax and also ironing out the legal issues.
If some enterprising Pension Funds want to use gold for reverse mortgage then that should also be treated similarly. A relationship-based society such as ours is trying to cope with changes through a rule-based Anglo-Saxon system. The Government can play a facilitative process, considering the plight of the elderly who are also often neglected by their children.