Having grown used to the idea of a young, aspirational India, it is quite disconcerting to discover that a rising elderly population could pose significant social and economic challenges in the years ahead, as the recently released India Ageing Report 2023 by the UN Population Fund (UNFPA) noted. The experience is not unique to India: the gradual ageing of a population over time is a natural demographic shift caused by falling fertility rates and higher longevity. Thus, it is not the ageing per se, but the pace of ageing that is a matter of concern. The population of India has been ageing at a faster rate since the early 2010s. It took 67 years from 1950 to 2017 for the 65-plus population to double from 3.1% to 6%, but the next doubling is projected to happen in just 25 years. By 2050, one in five Indians will be over 60 years of age, that is, effectively a senior citizen.

Old and poor

An ageing population dampens GDP in several ways: older people usually don’t work, they pay less taxes and consume fewer items, all the while drawing down on pensions and social benefit schemes. Therefore, the economic cost of old age support increases with an ageing population. But India’s income is not likely to grow as rapidly as its elderly cohort. Worse, the working-age population (15 to 59 years) is expected to peak at 64.8% of the population by 2031, while the elderly population will keep rising. Even under the most optimistic growth assumptions, per capita GDP will remain lower than the $10,000 threshold until the 2040s. India runs the risk of growing old before it grows rich.

This will have two consequences: an older, potentially less productive workforce, and upward pressure on future fiscal deficits. Mitigating actions that India should seriously consider include bringing more women into the workforce, and harnessing the potential of the elderly.

Rethinking retirement

People retire when they reach the retirement age, have poor health, struggle to find work, or attain adequate pension or savings. Each factor can be looked at to find ways to enhance the elderly’s productivity. Raising the official retirement age could postpone pension spending. Though unpopular in rich countries—France saw massive protests earlier this year after a similar move—opposition is less likely in India, where workers are often not well-prepared for retirement. The 2023 India Retirement Index Study shows that one in three urban workers worry about depleting their retirement corpus within five years.

Second, a government-backed active ageing programme to promote preventive health, incentivize upskilling, and discourage age-based discrimination is needed. Not all older workers can afford to or want to retire: surveys by the Centre for Monitoring Indian Economy show around 7% of 65-plus workers are working or looking for work. Thus, the mindset that older workers cannot contribute needs to be reversed.

Sustainable pensions

Pension coverage in India is quite inadequate. About 12% of the workforce has formal pensions; the rest—mainly informal sector workers—have to depend on the public provident fund or post office savings schemes. Nevertheless, the shift from a defined benefit to a defined contribution system in 2004 was an important step towards sustainable pensions. Recent reversions (or promises to revert) by some states risks fiscal disaster.

An India-specific solution, such as the guaranteed pension scheme adopted by Andhra Pradesh, which combines aspects of the old and new systems while guaranteeing a minimum pension, offers an acceptable middle path. It may also be a good idea to market the new pension scheme or retirement-specific annuities better—after all, the popularity of mutual funds owes much to its successful advertising campaign. A few far-sighted decisions can turn this impending old age crisis into an opportunity for reform.