In an interaction with RBI Chair Professor Charan Singh at IIM Bangalore, Dr. Kenneth Apfel says India must take its cue on pension reforms from USA In a presentation at IIMB, before this interaction, Professor Ken observed that over course of the last 75 years, the United States has instituted a well-developed and nearly universal retirement security system for citizens. The anchor of the US system is Social Security - a programme that provides universal lifetime benefits to nearly all older Americans. All parts of the US retirement system currently face significant challenges. India is in the early stages of developing its own pension systems, with substantial programmes already in place for the formal workforce, but only very modest programnes for the informal workforce. There is discussion and debate in India about next steps and whether to move to more universal solutions. Will the US be in a position to provide continued security for its citizens in the 21st century? And are there lessons that can be learned from the US experience, as India develops its own health and pension programs for the 21st century? Professor Apfel provides his assessments on these questions as well as his preliminary recommendations for Indian pension reforms.

Charan Singh: What are your thoughts on pension security in India given the fact that we do have a significant divide - 90% of India's population is in the informal sector and does not have any structured mechanism even as the remaining 10% enjoys the benefits of pension security that ensures a reasonable quality of life even after retirement?

Kenneth Apfel: India faces substantial challenges with regard to pension security. Pension policy is an area that needs long-term planning; not quick fix solutions. It requires years of strategic planning to develop strong pension systems for the future.  The formal workforce has a pension system - though not perfect - which can be modified. But, in the informal sector, virtually no one has pension security except the very poor who receive very small levels of support. India has a big gap in pension coverage. I also understand that family support was the primary source of support for the elderly in the old days. As the economy changes in India, there is a need for new and improved mechanisms to provide basic (economic) support for the elderly.

You mentioned that the pension given to the informal sector is very meagre. Yes, you are correct about it - it is just about Rs. 200 and in some cases about Rs.500 a month. India being a poor country and a relatively smaller economy, what are your thoughts on the amount of pension that is already being disbursed to some elderly in India? Would not enhancing it prove to a burden?

Some countries, which are in the same economical circumstances as India, are moving closer to universal pension systems. China is formulating policies in providing basic economic security to its elderly. Nepal provides social pensions for a large and growing proportion of its ageing population. The question really is: what are the best mechanisms for India to consider moving forward to a universal system of basic economic security? Not just for the 10% of the formal workforce but for the rickshaw drivers, factory workers, shopkeepers? This is the group that has no secure retirement system and to develop that in the next few years we need to think on a long-term basis and start planning right away.

The government should commit and earmark a certain amount towards economic security of the elderly - in terms of 20 years from now, 40 years or 50 years from now. Because planning now is necessary. It is necessary to think about the fiscal rules that are imperative to build these programs. Universal social pension needs to be established.  I recommend a core basic social pension for all, perhaps with a relatively high retirement age.  India should start small and build the structure at this stage so that India is ready, as its economy changes, to make the necessary changes in the basic social pensions.

India is an emerging market, but per capita income is still low. We also record a very high gross fiscal deficit.  At the cost of incurring a higher fiscal burden, should we start providing for universal pension?

The short-term fiscal situation of course is very challenging in India. Frankly, if India's economy is not growing at a substantial rate, the investments in pensions will be much harder. If one assumes that the economy will grow at a relatively acceptable rate, the key question is where should the growth be invested?  Very little attention currently is given to the economic situation of the elderly as part of how that fiscal dividend would be expended.

How about public and private partnership in this sector? Sometimes, I wonder whether the corporate sector which is making huge profits and reaping substantial benefits of economic growth should also be contributing to care for elderly. Though not directly but in terms of providing medicines and financing mid-day meals through corporate funds for the existing elderly. For the purpose of future social security, the present day young and middle aged employees can be advised to start financial planning for their old age through investments in modern financial instruments. Has something like this been experimented elsewhere in the world from where we could learn some lessons?

There have been multiple and different approaches proposed to address the challenges of elderly income security. First and foremost is the basic foundation of social pension that protects - at a minimal level - virtually everyone. This is the cornerstone and no public-private partnership can achieve that.

In the private sector, building incentives for greater retirement savings for formal and informal workers is a very important consideration. Certainly pharmaceutical support through public-private partnerships and nutritional aids can be suitable supplementary supports but they cannot replace the basic foundation. Core foundation is the number 1 priority, added savings is the number 2, and supplementary sources are needed to complement but not replace the first two.

In India, there are more than 10 crore people who are above 65 years and can be called elderly. Many of them are poor and some of them continue to work because they cannot afford to retire. Further, we have a provision of Corporate Social Responsibility (CSR) and I believe that the corporate sector should also participate in taking care of our elderly, many of them suffering from poverty. Private sector can finance developing hospitals for elderly as well as help in building a cadre of medical professionals specializing in cure and treatment of ailments/ diseases of elderly. This would go a long way in improving the quality of life of the elderly.

Would you like to share with us some of the lessons we can imbibe when adopting social security measures for the elderly here?

One of the important lessons from the United States deals with the importance of thinking 'universal solutions' as opposed to 'targeted solutions'. India has a long history of creating small targeted programs and schemes for specific subsets of its population. The US has established for the elderly two key universal systems: The universal pension of social security and the universal health care system. The impact of both is unbelievably huge. If we look at the pension area, social security poverty rate for the elderly went from over 35 per cent to under 10%.  If social security universal benefits were gone tomorrow, half of the elderly in America will be living in poverty. In healthcare, 98% of the elderly have no health insurance down from 50% a half century ago. I think the single most important lesson from the US is the importance of creating modest universal solutions. For India, build universal systems in a modest way.

Another US lesson relates to the retirement age. It is harder to raise the retirement age than it is to lower the retirement age. If the economy continues to improve, the age can be lowered. 

With your experience, who should be responsible for providing pension? Should it be the central government, state government or the local bodies or municipal corporation? The objective is that we can achieve maximum coverage of the elderly with minimal leakages in the system?

I believe the core basic security for the elderly should be from the Union government. If we think about India 30 or 40 years in the future, pension systems that are designed locally will become problematic.  This is a national challenge that needs a universal national solution.

(About Prof. Kenneth S. Apfel:  He is Professor at the University of Maryland School Of Public Policy, and the Academic Director of the School's Management, Finance and Leadership Program.  He serves on the Maryland Health Exchange Board, implementing the Affordable Care Act in Maryland. Dr. Apfel also recently served as the Board Chair of both the National Academy of Social Insurance and the National Academy of Public Administration in Washington, DC. Prior to his academic appointments, he served in several executive positions in government - as the Cabinet-level Commissioner of the U.S. Social Security Administration, as the Associate Director for Human Resource Programs at the Office of Management and Budget in the Executive Office of the President and as the Assistant Secretary for Management and Budget at the U.S. Department of Health and Human Services. Dr. Apfel is spending the Spring 2014 semester as a Fulbright scholar in Delhi at the National Council of Applied Economic Research, examining India's health insurance and public pension policies.)