Blueprint on pension for the masses

(State pension plan for the poor simplified and exampified by a unique initiative of the Rajasthan government. Time for other states and centre to catch up.)

There are about 137 million low-income workers in India with monthly incomes of up to Rs 3,000, for whom retirement is not an option. In 60 years of independent India we have not yet got round to tackling this. The good news is that some path-breaking work is beginning to take shape. It could be the blueprint for the government to deliver targeted pensions to the poor.

Low-income workers comprise people who are wage labourers, those involved in primary production, street vendors, contract workers, etc. Nearly all of them continue to work till the limbs permit. Over 80 per cent of this population is below 45 years and therefore can benefit significantly if they have a pension scheme that is accessible, inexpensive and well designed.

The Rajasthan government has recently introduced an innovative pension scheme that is targeted at the low-income workers. This is the first scheme of its kind in the country. The state government has identified 20 occupations that serve as a proxy for the poor to roll out the scheme. Using technology and ground level partnerships with worker associations the scheme proposes to target at least 500,000 low- income workers.

For each scheme member the government contributes up to Rs 1,000 per annum to motivate the workers to save for their own retirement and also to ensure that the pensions at the time of retirement are at above poverty levels. A worker who puts in Rs 1,000 per annum gets an equal amount into his pension account from the government.

The benefit is capped at Rs 1,000 per annum for its optimum spread. Therefore, someone who puts in Rs 1,500 also gets Rs 1,000 and someone who is able to contribute only Rs 600 shall benefit by Rs 600. This matching act is an incentive to encourage workers to save up to Rs 1,000. This level of savings requires a worker to save Rs 2.75 per day and there is adequate incentive for even a very poor worker to save. The scheme does not allow early withdrawals, which ensures that the objective is not sacrificed. Other large states are also examining schemes on similar lines, with Madhya Pradesh being one of them.

Co-contributions are unlike just another subsidy. In fact they are not. All tax payers already enjoy similar concession. For instance, if you invest up to Rs 100,000 in specified savings instruments the tax department gives you a tax benefit of Rs 30,000. Just like we who pay taxes get a tax "top-up" for savings under Section 80C, the low-income workers also need similar motivation even though they do not have income to be counted as tax payers.

The result of co-contributions is significant for the retirement savings of a low-income worker. For instance, based on LIC rates, a co-contribution of Rs 1,000 per annum for a worker contributing an equal sum over a period of 25 years results in a monthly pension of Rs 1,275 per month with a simple 3 per cent growth rate in the monthly pension every year.

Outside of state governments, occupation-based groups and grassroots finance institutions are keen to work in delivering pensions to low-income workers. An experiment that Invest India began in SEWA Bank in early 2006 where poor women workers pooled in Rs 50-100 each month to begin saving for their retirement has over 30,000 members, out of which hardly anyone has opted out. These women have individual pension accounts and their savings flow into a portfolio comprising a mix of debt and equity. Since then, UTI AMC has developed many such partnerships in the last two years to deliver long- term savings products to the poor.

In case the government comes forward to co-contribute, it would be feasible to target those who have access to banking and micro finance and/or belong to low-income occupational groups (for example, construction workers, bidi workers, salt workers, fishermen, small dairy workers, etc).
During my interactions with large occupation groups in the country over the past 18 months, the demand for pensions was found to be consistently high. Technology and good product design can be used to overcome the challenges of high transaction costs and widespread coverage.
Data suggest that about 50 million of the above low-income workers are keen to save for their retirement and are willing to co-contribute at least Rs 1,000 per annum. This will cost Rs 5,000 crore per annum or just 0.1 of the GDP.

Even at the dizzying limits of covering all low-income workers the annual bill would be Rs 13,700 crore. That is 0.30 per cent of GDP.

Unlike waiving farm loans, which means penalising those who sweat and toil to ensure repayment, pension co-contribution would be a positive motivation. The funds can be transparently and directly invested in an investment fund and the worker would get the money only at the retirement age. The worker has to invest his own contribution during the working age to benefit from the scheme. Why just Rajasthan? Each state can announce such a scheme. The central government too can participate.

Proxy means using occupation-based groups and grassroots credit groups are one of the ways of ensuring targeted coverage. There is evidence that they can be used for the delivery of retirement savings benefits and low-income workers are keen to save for retirement with or without the benefit of co-contributions.
(with excerpts from the Business Standard)