No Financial Planning For Retirement Could Be An Emerging Crisis For India's Rising Workforce

The growing workforce in urban India is not prepared for retirement. With stagnating incomes, high inflation, falling household savings, and a high consumption propensity, India’s young working professionals are now finding themselves without enough disposable income to plan for retirement.

“Our life expectancy has gone up meaningfully. Nearly 30 years of life (has been added) after retirement. We have not done enough planning to manage those 25 to 30 years, either as individuals or even as a society or the government,” Nitin Jain, MD and Chairman of Neo Wealth and Asset Management, and former CEO of financial services company Edelweiss Wealth, told The Core.

India, with its rapidly ageing population and increasing life expectancies, faces a looming retirement crisis. While more and more Indians are joining the workforce, they aren’t really planning what they will do after retirement. 

A change in lifestyle has also impacted how Indians save. There has been a shift in societal structures, where reliance on familial support systems is also on the decline. With approximately 10 crore individuals aged 60 and above, a demographic projected to triple in the next three decades, there is an urgent need for effective retirement planning.

Not Enough Savings

In 2022, a joint study conducted by Max Life Insurance and marketing data firm Kantar attempted to study the preparedness of urban salaried individuals for financial independence in retirement. The findings revealed that retirement planning wasn't a primary concern among urban Indians. However, respondents were concerned that savings might not be enough to sustain life in old age, with only one-third actively prioritising retirement goals. About 90% of the survey respondents aged 50 and above regretted not initiating retirement savings earlier on.

“The cost of healthcare, the cost of living, everything is going up dramatically. If you don't take steps, important steps right now, I think it can, it can become quite difficult,” Jain said.

The looming retirement crisis is not typical only for India. Larry Fink, the chief executive officer of the world’s largest asset manager BlackRock, in his annual letter to investors in March, said that securing a well-deserved retirement would be one of the significant economic hurdles for the United States in the mid-21st century. BlackRock manages about $10 trillion in assets, including retirement funds. 

Fink said that while significant progress was made in terms of medical advancements, similar efforts were not made toward financial planning for longer lives, with one in six people worldwide expected to be over 65 by 2050, compared with one in 11 in 2019.

For individuals between 25 and 30 years of age, who are only starting their professional careers, balancing short-term financial goals such as rent, electricity bills, internet bills, and buying a house with the long-term objective of building a secure retirement fund is crucial. In such a situation, the challenge lies in creating wealth without compromising too much in aspirations.

According to Jain, there needs to be an understanding of the value of wealth creation both on an individual level and through policy interventions. Young professionals should be exposed to growth asset classes like equity, through mutual funds or direct equity as those create more returns over a long period than any other instruments.

Increasing Loan Burden

According to a report by rating agency Care Ratings, unsecured personal loans surged over four times to reach Rs 13.32 lakh crore by March 2023, compared to Rs 4.26 lakh crore in March 2017. The total number of personal loans nearly tripled during this period, to Rs 51.7 lakh crore. The combined personal loan portfolios of banks and non-banking financial institutions expanded by about 1.5 times between FY17 and FY23. As of March 2023, these personal loans constituted 30.3% of the overall credit market, which amounted to Rs 170.5 lakh crore. The Core had earlier reported on how India’s young professionals were caught up in the vicious EMI cycle.

The increase in demand for loans has also been accompanied by a fall in household savings. According to the Reserve Bank of India data, household financial assets, including bank deposits, cash, and equity investments, after deducting debt servicing and consumption, declined to 5.1% of gross domestic product in the fiscal year 2022-23 from 7.2% in the previous year.

“One of the things that I would recommend very highly to young people, at least right now, is that despite the desires that all of us have to consume, I think it's not a great idea to really borrow for consumption. If most people can just avoid that one habit, I think they'll do themselves a great favour, Jain said.

While wealth needs to be created at an individual level, it would also be beneficial if the government found a way to expand the scope of pension funds and make them more accessible. 

Currently, the pension system operates as a defined contribution scheme, which means that individuals do not bear any financial risks. However, by increasing the net on pension funds and altering its structure, by allowing for more flexibility, the government could enhance the benefits for individuals. 

“If you see most people are investing in either PF (provident fund) or NPS (National Pension System), purely for tax saving purposes. It's very difficult to tell them that at the age of 30 save money for your retirement. I do think the current limits that are available on PFs and NPS are very restrictive. I think the government should reconsider probably the limits and maybe they can increase it meaningfully from where it is today,” Jain said.