In the Long Run We are All, BUT Dead
Ninety One years ago, John Maynard Keynes said, “In the long
run we are all dead”. This perhaps is one of the most misquoted phrases in
economics. [Economists set themselves too easy, too useless a task if in tempestuous
seasons they can only tell us that when the storm is long past the ocean is
flat again. – A Tract on Monetary Reform (1923) Ch. 3]
Changing Demographics
The British economist, 1st Baron Keynes would never have
imagined that in Britain a child born in 2020 would live for 100 years. In a
country like India in 2014, a child born is likely to live five years more than
children born a decade ago. Statistics released by Indian Ministry of Health
and Family Welfare show that life expectancy in India has gone up by five
years, from 62.3 years for males and 63.9 years for females in 2001-2005 to
67.3 years and 69.6 years respectively in 2011-2015. Experts attribute this
jump — higher than that in the previous decade — to better immunization and
nutrition, coupled with prevention and treatment of infectious diseases. The
World Health Organization defines life expectancy as "the average number of years a person is expected to live on the
basis of the current mortality rates and prevalence distribution of health
states in a population". In India, average life expectancy which used
to be around 42 in 1960, steadily climbed to around 48 in 1980, 58.5 in 1990
and around 62s in 2000.
Interestingly, while the Quantity of life is on the rise,
the Quality is worsening. It is deteriorating for various reasons including
health and hygiene on one hand and ranges from socioeconomic factors like
greater dependency in a nuclear family (as opposed to a joint family) to lack
of social security on the other. High Inflation also plays a predominant role
in adversely impacting our ability to fight poverty in old age. Populations
world-wide are aging. In India, while the total population is rising by 49
percent between 1991 and 2016, the number of elderly persons (aged 60 and
above) is expected to increase by nearly 107 percent to 113 million. In other
words, the share of the aged in the total population will rise to 8.6 percent by
2016. Demographic projections further suggest that the number of elderly
persons will rise even more rapidly to 179 million by 2026, or 13.3 percent of
the population (OASIS Report, 2000). While we witness an increase in the number
of aged, the traditional methods for income security (such as the joint family
system) are increasingly unable to cope with the enhanced life span and medical
costs during old age. Demographic trends
in India, combined with poor coverage by existing financial products, suggest
that India is moving towards a significant number of elderly poor and there is
a strong need to instilling new savings behaviors among the youth and working
populations that would free them from depending on their adult children in
their old age and allow them to save modest sums through their long working
years.
In the Long Run, All We Need is a Pension
Imagine we work for 10 – 12 hours a day while in our 30s and
40s and may be 8 – 10 while in 50s. But our capability to work drastically
reduces the moment we cross the senior citizen stamp at aged 60. And as we move
from 60 onwards, our physical capacities to earn livelihoods reduces disproportionately
quicker. While we are in our 20s we do not wish to think about old age as our
wishes are more, short run myopic. In 30s we dare think about retirement as the
idea of old age gives us jittery shivers and we better avoid it. In forties we
feel that we are ageing rapidly and hence need to plan for the old age, by the
time we decide to do something about it in the mid 40s, we have already perhaps
missed the bus. At fifties, we feel that if Wishes were Horses, beggars would
ride and With just one decade to save for our retirement, can we think of
saving to last us for next 3 decades, say from 60s to 80s? Can we accumulate
enough in the short term so that when we are 60, we can live comfortably till
we join the majority? Can our savings beat Inflation and Health shocks while in
the old age? Will we not Compelled to work at least on a part time basis till
we join the majority? In developing countries like India and Bangladesh a Poor
has to Work Until he Dies, he has no other option. With dismemberment of joint
families, migration of children for better employable opportunities and
urbanization, most of our generation is already the feeling the pinch of being
left on their own and amongst the poor, if the main breadwinner is out, there
is hardly anything left of the old parents. The chances of a son sending
remittances to the old and poor parents are bleak as the children themselves
are not in a position to make their own twains end meet.
Why starting early is proved by the fact that a mere five
years of delay while you are in early 20s can cost you a million at the
terminal corpus. We always provide teachable moments where we explain that
while Ganga started saving at aged 20, Jamuna learnt the same only at 25. Assuming
both of them contribute Rs. 1000 a month and that the rate of returns is a
nominal 10% for both, the mere fact that Ganga saved for an additional 5 years
(20 – 25) an amount of Rs. 60,000/- (5*12*1000) took her terminal value to Rs.6,324,080
while Jamuna could only gather a terminal value of Rs. 3,796,638. The
difference of Rs.2, 527,442 is due to the number of years of compounding of the
initial value of Rs. 60,000 over the next 35 years (60-25). This magical power
of compounding or the time value of money has to be understood well before
starting or rather delaying one’s decision to invest. With same parameters, if
someone would start saving from the age of 30, or 40, or even 50, one would
have had a corpus of Rs. 2,260,488; Rs. 759,369 and Rs. 204,845 respectively at
the retirement age of 60. Hence the more number of years that one saves, the
greater would be the terminal corpus value, other things remaining equal.
The Privileged Pensioners
Civil servants retire at 60 and start drawing pensions and
in a developing country depends on the earnings and hence taxes of the next
generation. They are a privileged lot as
most of them have a handsome pension that is inflation and wage indexed. At my
first posting as Treasury Officer Indore, I was delivering pensions and I
remember a nonagenarian pensioner who told me that he worked for the state for
25 years and had just attained 50th year of receiving pension. State
pensioners who retired in 1984 are now receiving their pension which is 20
times more than their last drawn pay after 30 years of retirement.
Government and private companies in India have historically
provided pension only for their own employees. As a result, 90 percent of the
working population in India who are in most desperate need of old age pension,
are ineligible to participate in formal pension or savings programs meant to
provide old age security. Banking and financial systems are also not designed
to cater to support micro-savings programs, as transaction costs in building
awareness and in processing payments increase significantly. The network of
banks and financial institutions in remote areas are also few. The NPS of the
PFRDA along with the Swawalamban benefits have reached only to few where even the
retention ratio is lower as people sign up for NPS Lite without fully
understanding the need for it.
Though it be Madness, Yet There is Method in it.
Simulations suggest that we would need much more in our old
age than we can even imagine. Just using the thumb rule of 72, our expenditure
would double over every 7.2 years if inflation rate is 10% (7.2*10=72) and
every 6 years if its 12% (6*12=72). Assuming an inflation rate that is prevalent
in India ie of 9%, our expenditure would double every 8 years (8*9=72). If you
belong to an average Indian age, you are currently aged 30 and lets say that
your monthly expenditure is Rs. 50,000. With a 9% inflation, your expenditure
would double every 8 years would mean Rs. 100,000 at aged 38; Rs. 200,000 at 46;
Rs. 400,000 at aged 54; Rs. 800,000 at aged 62 and Rs. 1,600,000 at the age of
70 years. Even if we discount that your
lifestyle change post retirement could bring down your expenditure by half, you
would still require Rs. 800,000 pm at the age of 70. So do we have enough
savings while we earn so as to manage a monthly pension of Rs. 800,000 when we
reach 70 and still live for another decade or two. The numbers could be scary and
carry madness, yet there is method in it. It is for us to realize as to where
are we heading for?? Are we planning a safe future for ourselves or are we
simply leaving everything for the Almighty to take care of us when we are old. Our
myopia would simply not work, we must start at the age of Ganga and not wait
for Jamuna. In case, we have missed the bus, lets compensate for it immediately
and then start saving a higher amount for lesser number of years. Remember, that Every additional year of life expectancy
costs a pension plan between three and four percent in present value terms. Is
it not high time that we moved beyond the ‘Getting and Spending’ and start
Saving for our own old Age? For, in the Long Run We are Not Dead, But Alive and Need a Pension that would Last Our Lives.
