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 50^th 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.