The economic burdens and social problems of the country’s ageing population deserve more attention than it has received. The ageing of the country’s population poses grave economic and social problems. Over the next two decades Sri Lanka is expected to have a low population growth with consequent rapid ageing of the population around 2020.
While the child dependency ratio is expected to decline from over 50 per cent in 1991 to 38 per cent by 2001, and be less than 25 per cent around 2030, the old-age dependency ratio could increase from about 15 per cent at present to 32 per cent in 2026 and to as much as 48 per cent in 2041. By the middle of the 21st century persons over 60 years of age would constitute about half as many as those between the ages of 15 and 60. This is the seriousness of the impending ageing population.
Dr P.B.Jayasundera, Secretary to the Ministry of Finance and the Ministry of Economic Development drew attention to the fact that the country is facing a severe burden owing to the rapid ageing population. In his keynote address at the Annual General Meeting of the Sri Lanka Planning Services Association in Colombo recently, he said that earlier population growth was booming and the advice was family planning.
As a result of family planning the ageing population is growing and in another 20 years, 20 per cent of the population would be over 60 years. While the ageing population is increasing the population below 60 is decreasing and therefore the number of dependents would also increase. The younger population has to earn more to look after the older population, he pointed out.
Economic challenges
The ageing of the country’s population poses serious economic and social challenges. It would affect incomes and economic conditions of the elderly, the viability of pension schemes and increased pension payments to public servants would be a strain on the public finances of the country. Government pensions could absorb as much as 20 per cent of expenditure in the future, and distort the public expenditure pattern, with serious implications for public investment and economic growth. Furthermore, the retirement benefits cover only part of the workforce, perhaps less than one half of the workforce, and are inadequate for an extended period of life. Workers in the unorganized or informal sector have to rely largely on their savings or participation in several new pension schemes for informal workers that cover only a small proportion of self-employed workers.
Inadequate retirement benefits
Although the country has several social-security systems, such as the Employees’ Provident Fund (EPF), the Employees’ Trust Fund (ETF), private pension schemes, and a pension scheme for public servants and their widows and orphans, these do not take care of the expenditure needs of the elderly at retirement adequately. Furthermore these retirement benefits cover only about one half of the working population, as most employment is in informal activities. The workers in the informal sector have to rely largely on their savings or participation in several new pension schemes for informal workers that include contributory pensions for farmers, fishermen and the self-employed. However, these cover only a small proportion of self-employed workers.
EPF, ETF and other private schemes are most often inadequate as their returns on funds, and expected annual real incomes from them are both inadequate and diminishing over time. Thus there is a need to reconsider the financing of these schemes. The investment of such pension funds so as to generate a better return that can be passed on to the retirees, and also higher contributions during the period of employment need to be considered. This is supposed to be the logic for provident fund investments in the stock exchange. Prudent investments are however needed as otherwise the funds may be at risk.
Sustainability of pension schemes
Increased longevity means that the retirement years are longer. The extended period of retirement implies that any pension scheme to be sustainable would require significantly larger sums as contributions from employers and employees during the period of employment. If the average working years are 30 and the period of retirement is 15, then the contributions of 2 years of working life would have to finance 1 year of retirement benefits, assuming that the rate of inflation would be equal to the interest earnings of the funds. This implies very high contributions or low retirement benefits. Even at present, Sri Lankans have one of the longest expectations of retirement years in the world. When a person lives for 22 years after retirement, the contributions may need to be very high if the benefits are to be adequate.
Owing to the longer life expectancy, the heavy payment of retirement benefits would impair the viability of pension schemes. Although the issue of viability of the government pension scheme does not arise, as the payments are not paid out of a pension fund, the cost on the annual budget would tend to escalate as retirees live for longer periods. This has serious implications on the public finances.
At present, government pensions that absorb 10 per cent of current expenditure, could absorb as much as 20 per cent of expenditure in the future and distort public-expenditure patterns with serious implications for public investment and economic growth.
Extending retirement
There is therefore a need to revise the employment lifespan. The retirement age of 55 years for men and 50 years for women in the public service, with a possible extension of another 5 years, was designed at a time life expectancy was around 55 years. With an expected increase in life expectancy to over 75 years by 2020, there is little justification for retaining the retirement age of 55 years. An extension of the retirement age to 65 years would place a lesser strain on current contributions, could increase retirement benefits, and would reduce the period during which retirement benefits would be needed to support retirees.
Efforts to extend the retirement age have met with opposition owing to a lack of understanding of the issue. Countries with an ageing population and increased lifespan have been revising their retirement ages. Canada, Singapore and many states in the USA have extended their mandatory retirement age, generally by about 5 years.
Erosion of benefits
Life expectancy is expected to increase to 75.8 years in 2020-2025, and to 78.1 years in 2045-2050. These added years of life will have to be financed from savings made during the working years. The ageing of the population results in erosion of the real value of pensions in latter life due to inflation. The provision of adequate income for the extended post-retirement period is one of the serious problems arising out of longevity.
The erosion of the real value of pensions is a serious issue due to the high inflationary trends that erode both pension benefits and the savings of retirees. The longevity of life implies that in the later years of a retired person’s longer life the real income would tend to be inadequate. This is particularly so as expenditures on medicine, drugs and hospital charges are high and subject to sharp price increases. There is a need to look into ways and means by which the real incomes of retirees could be adequately protected.
Conclusion
The ageing of the population has several economic implications that bear on the well-being of the elderly. The coverage of retirement benefits is limited, pension payments are inadequate, pension schemes are unsustainable and there is serious erosion of etiree’s incomes. These issues must be addressed through pension reforms and the retirement age of persons. It is certainly opportune for the country to face up to the economic problems of an ageing population.
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