Growth options

Friday, 5 April 2019 00:00 - - {{hitsCtrl.values.hits}}

Sri Lanka’s ageing population and low growth has left the Government sitting on a fiscal time-bomb. After decades of steadily increasing recruitments to the public sector, the State will have to increasingly dole out larger amounts as pensions. In addition, there is a large segment of the population that is not employed by the public sector ageing without viable retirement plans.

The warnings, which have been swirling unheard for decades, that unless the Government pushes forward with labour reforms, Sri Lanka is in grave danger of being unable to support its ageing population. To stretch out the demographic dividend it is important to expand the working timelines of this population category, but that also requires having stronger social security for them.

According to World Bank estimates, by 2030, one in every five Sri Lankans will be over the age of 60. This means that each family could well have more than one retired person. With fewer younger people to support a larger ageing population, it is essential to have income security for the elderly to ensure they remain independent and have access to a decent quality of life.

In 2012, 13.2 million of the population were 15 to 59 years old. Of these, 7.6 million were economically active. However, only five million workers were eligible for pensions under various employment-based pension schemes. Of those, only 2.3 million workers were enrolled in a pension scheme. Even then all enrolled were not effectively covered.

Only the public sector pension scheme covers the total eligible population. This is also one reason why State employment is so sought after but whether this pension keeps pace with inflation remains a concern. The estimated coverage for other pension schemes fluctuates between 18% for the self-employed pension schemes to 64% for the farmers’ pension scheme. However, the effective coverage is estimated to be much less, possibly as little as 11% for the self-employed and 38% for farmers due to non-payment of dues in the contributory programs. Only an estimated 1.7 million were effectively covered by a pension scheme.

Unfortunately, all informal sector pension programs define benefits in nominal terms. The real value of these benefit amounts will be much less when the pensions are received. For example, the pension scheme for self-employed promises a Rs. 1,000 pension benefit at retirement. The real value of this benefit for a person aged 40 today will be Rs. 471, assuming 5% inflation. This has been observed in the public pension scheme as well, where those in less lucrative public jobs find it difficult to make ends meet and rely heavily on their families. This is also one reason why the Government introduced preferential interest rates for fixed deposits and savings accounts for senior citizens.

The pension burden becomes even more daunting when the health costs of an ageing population are factored in. As Sri Lanka is facing a demographic shift before it reaches a high level of economic growth, the labour markets will also have to shift so that older people have to opportunity to continue working if they are able. The policy shifts are challenging, and the longer they are postponed the harder they will become.