The Retirement Age Dilemma in Traditional Pension Plans

By Pratiksha Jena, Edited by Amogh Sangewar


‘And in the end, it’s not the years in your life that count; it’s the life in your years.’

- Abraham Lincoln


Pension plans are old-age support and security systems with which individuals can financially secure themselves once they retire from the workforce. When individuals sign up for such pension plans, they primarily do so to maintain the same lifestyle (if not better) post-retirement. The idea of old-age support systems in India originated in 3 BC, where the king had to pay half of the wages for people who had crossed forty years of age. During the colonial period, the British provided retirement benefits to almost all workers in the public sector. Post-independence, steps were taken to provide retirement benefits to private-sector employees as well.


Today, there exist various pension plans in India, such as civil service schemes, employee’s provident fund organization schemes, National Pension Scheme, micro-pension schemes, and occupational pension schemes, among others. What binds such schemes is the stipulated retirement age at which savings under such plans mature. In India, pension schemes often assume sixty to be the retirement age. While some schemes even allow maturity at the age of fifty-five or sixty-five, sixty is often quoted as the retirement age in India. At face value, this age doesn’t pose a problem. However, upon further contemplation, this age has severe economic implications.


Due to the improved standard of healthcare in the country, the average life expectancy in India is steadily rising. Indians, on average, are living longer than they did a few years ago. This means that they need to save a larger sum of money during their working period to enjoy the same standard of living once they quit their jobs. This becomes a problem for the government because it implies that the number of senior citizens dependent on the State for regular pension payouts is increasing. For instance, if a retiree today ends up living three extra years in retirement, the government needs to meet the monetary requirements in pension payments for that retiree for three additional years. Thus, the increasing senior citizen population due to an improvement in healthcare is placing immense pressure on government revenues today. With many citizens exceeding the average life expectancy rate, the pension system is approaching the brink of collapse.


Increasing life expectancy also implies that senior citizens are not just dependent on the government but also on the younger generations for maintaining a decent standard of living. This is an additional burden for young individuals who not only need to save for their retirement but also provide for the senior retirees who are dependent on them. Inflation is another phenomenon to account for as rising price levels reduce the worth of investments with time. The amount you put into your savings account today is likely to be worth a lot less upon maturity. Today the average life expectancy in India is approximately 70 years, with 1264.12 thousand individuals attaining ninety years of age as of 2020. Pensions received post-retirement were never meant to fund thirty years of luxury! While the life expectancy has increased, there has been no commensurate change in our existing pension schemes.


Increasing the retirement age in India is a popular solution that is being suggested today, as it would not only prevent insolvency of the pension system but also enable aging yet skilled workers to continue contributing to economic growth. For instance, if a sixty-year-old software engineer who is still in touch with his profession and suffers from no severe health issues can continue working, his productivity will contribute to economic growth. Furthermore, allowing him to work will enable him to earn more and, consequently, save more to sustain himself for comparatively fewer years after quitting the workforce. In this way, the pension system could remain solvent as it would be required to fund fewer retirement years. The money thus saved could be used to address more pressing matters or to pay those retirees who are on the brink of poverty but cannot receive regular pension payments as the current pension system isn’t stable.


It would even reduce the burden on the younger generations, who would have a more significant proportion of their income to spend for themselves. When young individuals in the workforce face the pressure of supporting their elders, they invariably work longer hours to earn and save more. Thus, the higher retirement age for senior citizens would enable the younger generations to engage in personal fulfillment activities as well as lower their mental strain by preventing overworking. Opponents of increasing the retirement age, however, argue that life expectancy does not uniformly increase across the workforce. Workers who have consistently worked low-paying jobs have a lower life expectancy than workers in high-paying jobs. In such a scenario, raising the retirement age to (say) seventy years would deprive workers with a lower life expectancy to retire and receive their pensions early, thereby making financial security in retirement a distant dream.


These arguments reflect that the traditional pension policies in India are highly tenuous, and if not paid significant attention to, can have parlous effects on the government’s revenues and the financial stability and security of working and senior citizens alike. To save adequately for the future, an individual must have answers to three questions - how long they will live, at what rate inflation will rise, and how the markets will behave. Answers to such questions as well as the ongoing debate on fixing a retirement age have not yielded substantial results so far. An alternative solution would be developing cash flow assets that ensure the availability of cash post-retirement during good and bad times, and booms and busts. Developing a pipeline of assets that provides continuous cash flow will erase the possibility of running out of money post-retirement - a prospect that individuals entwined in traditional pension systems are most apprehensive about.


While most regard homes and personal automobiles to be valuable assets today, they aren’t the best to invest in, simply because their maintenance costs are high. Robert Kiyosaki - an American businessman and founder of Rich Dad Company and Rich Global LLC, has carried out extensive research on the best assets to ensure a consistent flow of money, even during retirement. According to him, money also flows out in the form of taxes and insurance in the case of homes and personal automobiles. He suggests and is also living proof of the fact that investing in stocks of publicly traded companies and income-yielding real estate properties are the best assets to ensure a sustained cash flow, irrespective of your age and participation in the workforce.


Investing in wealth-increasing assets during your working years will not only ensure sustained cash flow during your retirement years but will also enable you to enjoy a higher standard of living while you work instead of living life on a tight budget. Rather than focusing on the retirement age dilemma, educating the labour force on investing in wealth increasing assets throughout their lives will bring about financial independence, reduce the growing pressure of the financial needs of senior citizens on the government revenue, and will even ensure that individuals are able to maintain the same (if not a higher) standard of living once they quit working. As Robert Kiyosaki rightly said, “The idea of working all your life, saving, and putting money into a retirement account is a very slow plan.” This alternative approach to financial security during retirement will not only meet the goal of traditional pension plans but also limit the risks of the latter to a great extent.