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Paying for Mum and Dad  
Paying for Mum and Dad
by Dr Ila Patnaik
The columnist is a senior economist at the macro modelling and forecasting division of the National Council of Applied Economic Research (NCAER). Since completing her doctorate at the University of Surrey she has been tracking developments in the Indian economy. She is editor of the "MacroTrack", NCAER's quarterly update on the economy.

When families become nuclear, incomes become individualised, homes become smaller and responsibilities become more onerous, what happens to the old? Who pays for them?

Of the myriad changes taking place in India, the declining support system for the aged may be regarded by many as just one more. But its consequences could be economically quite devastating. That is, unless something is done fast to prop up this fast eroding support system.

Leaning on weak shoulders
The numbers tell the story: the world's population of people above 60 is poised to triple to 1.4 billion by 2030; most of this growth is taking place in developing countries; and half of it is happening in Asia, where per capita incomes are much lower than in the industrial nations. By 2030, India will have nearly a third of its population above 60 - that means around 433 million people.

And the reason for this burgeoning elderly population is better healthcare. It took Belgium more than 100 years for its share of over-60 population to double from 9% to 18%. In China, the same transition will take place only in 34 years; in Venezuela, 22 years.

If the extended family is not going to provide a haven for the aged, something else will have to. And that can only be a formal system of old age security. This much is clear enough. But how are these systems to be funded? Money, therefore, lies at the heart of the problem.

Developed nations increase the tax-paying base to fund old age security
Formal social security systems as found in industrialised countries are highly dependent on taxes. But these pay-as-you-go (PAYG) systems are impossible to sustain, especially when the proportion of the aged is growing and when 30% of the population has to pay for the remaining 70%, of which only a quarter may be below 18.

In the US, the Elderly Dependency Ratio, defined as the share of population above 65 to that between 15 and 64, is expected to rise from 0.19 to 0.37 by 2030 if there is no migration to the US during this period. A similar situation prevails in Japan, Germany, United Kingdom, France and Italy. That, in fact, is why the Western economies are under so much fiscal stress. In the next 30 years, they must cut down benefits and raise taxes sharply.

An alternative strategy has been found in the move to invite, perhaps even at the cost of some racial tension, transient high-skilled immigrants who earn high incomes and contribute significantly to tax payments but do not stay on to be a permanent burden on the social security system. The recent increase in H1B visas for professionals was part of this strategy. It is expected to help provide some reduction in the Elderly Dependency Ratio.

Brain drain in developing countries contracts already limited options
But developing countries do not have such alternatives. If anything, the brain drain to industrialised countries will reduce their high tax-paying salaried professionals and contribute to their fiscal strain. This makes it even more important for developing countries to devise systems that are sustainable and not dependent entirely on public funds.

While provident funds provide support in many developing countries including India, the problem of publicly managed funded plans is that they are mainly invested in government securities. They have an administered rate of return that may sometimes be lowered by the government to reduce its interest burden. They also lead to a preemption of resources by the government that may often be at the cost of the private sector. On the other hand, a privately managed system is also not very safe, as the risk involved is much greater. There is risk of default by the employer or the insurance company that manages the fund.

A many-pronged effort would work best for India
Experts therefore recommend a multi-pillar system which, when you think of it, is just what the extended family system is - contributions to the kitty for the old come from many sources and lead to income smoothening, which is the objective of the multi-pillar system. Likewise, it has been recommended that the management and financing of old age pensions should not be the responsibility of a single pillar - the taxpayer, the employer or the individual himself. The responsibility of the system should be shared among multiple pillars of old age support.

The public pillar could be kept modest in size so that it does not become a huge liability for taxpayers. It could be limited to the poorest income groups. The fully funded and privately managed system could carry out the income-smoothing and savings function for all other income groups. A third pillar could be a voluntary pillar for those who want more.

Whatever the extent of reliance on each system, it is necessary that this problem should be addressed expeditiously. Otherwise, under the current PAYG system, India will find itself in even deeper fiscal trouble.

To view more articles by the author, just type Patnaik in the Keywords search and hit go!

Copyright © 2000 Sharekhan.com & SSKI Investor Services Ltd. All Rights Reserved.

The views expressed in this column are those of the author and not of the institution to which she belongs. Also, Sharekhan may or may not concur with the views of the author. We do not represent that it is accurate or complete and it should not be relied upon as such.


 Very good article. I..  by   Rajiv  on  3-1-2001
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