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OLD AGE SOCIAL & INCOME SECURITY

As per the 1991 Census data, India has an estimated 314 million workers (9.4% employed in the organised sector and the balance 90.6% employed in the unorganised sector). Of the working population, 15.2% (47 million) are regular salaried employees while over 53% (166 million) are self employed and 31% (97 million) are casual/contract workers.

Of the salaried employees, approximately 23% (11.1 million) are presently employed by the Central, State and UT Governments and Departments (including post & telegraph, armed forces and railways) and are eligible to a non-contributory, defined benefit pension, funded entirely by the State. Government spending on non-contributory pensions is an enormous strain on revenues and will only increase over time with an ongoing increase in benefits as well as increasing life expectancy of the population (including current and potential pensioners).

Approximately 49% (23.18 million) of the salaried (non-Government) workers in the formal sector are covered by Provident Funds. These mandatory, employer centric, defined contribution plans (including EPFO, Coal Miners Fund, Seamen Fund, et al) cover only 177 industries and classes of establishments notified by the Government. In addition, within these specified industries, only establishments employing 20 or more persons need to provide provident fund benefits to employees. Further, employees drawing a monthly salary of 5000 or more have the option to opt out from contributions to PF.

Over 28% (13 million) of the salaried employees and approximately 89.2% (280 million) of the workers (including self-employed and farmers) are not covered by any pension scheme that enables them to save for economic security during old age. Though the Public Provident Fund (PPF) was introduced in 1968-69 to provide a facility to self employed persons to save for old age, it today serves only as a medium term savings instrument with liberal withdrawal facilities and tax benefits.Thus, the present formal provisions for old age income security in India cover less than 11% of the estimated working population.

However, even for these individuals, incomes generally fall below poverty line during old age despite the high levels of contribution (over 20% - among the highest in the world) prevailing in India. This is primarily due to low real returns and generous withdrawals. For instance, in 1996-97, Rs.2047 crore was prematurely withdrawn by 1.20 million provident fund members to fund marriages, illness, housing and purchase of insurance policies. In the same period, a total of Rs.3306.15 crore was paid out to 1.32 million outgoing provident fund members on account of retirement, death or leaving service - indicating an average lump-sum accumulation of Rs.25,000 per member.

Over the last decade, provident funds in India have earned a return of little over 2.5% over inflation for their members (as against 11% in Chile ). On the other hand, the long-run average rate of return on the equity index in India is 18.5%, which has the potential to revolutionise the wealth accumulation over a worker's lifetime. The average wealth that is obtained by investing Rs.5 per working day into the equity index, from age 25 to age 60, works out to Rs.36,00,865. Over such a long term horizon, there is a 99% chance that equities outperform bonds.

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