> Posted by Sonja E. Kelly, Fellow, CFI
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In most places around the world the subject of pensions is a sore one. In 2012, for example, in looking at arguably the crème of private employers, Fortune 100 companies, only 30 offered their U.S. new hires pension plans, down from 47 in 2008. For public sector employees in the U.S. in the same year, the pension plans of 26 states were less than 70 percent funded. In lower and middle-income countries where financial security is weaker, the situation is even worse. In India, the pension system only covers roughly 12 percent of the population.
The severity of these figures is amplified when we look at demographic trends. Between 2010 and 2020, the population of older adults will almost double in middle-income countries. Worldwide over the decade, it will increase by 40 percent. By 2050, there will be roughly 1.5 billion older adults, 315 million of whom will be in India.
Aging presents unique challenges and opportunities to the financial inclusion industry. During a session at the Microcredit Summit in Merida, Mexico a few weeks ago, five panelists met to discuss this topic. John Hatch (FINCA), Pilar Contreras (HelpAge), Caroline van Dullemen (World Granny), Reynold Walter (REDCAMIF), and myself all acknowledged the demographic reality—as populations age, if countries have not helped their societies and economies to prepare, they will face a global train wreck in the form of older people without adequate means of support and support systems that are overwhelmed. Financial inclusion can and should play a unique role in helping both individuals and whole countries mitigate risks.
Aging is an issue for everyone. We watch those in their older years – hoping to one day reach that life stage if we aren’t there already – as they manage their income and expenses, paying for health care, continued living expenses, and sometimes even supporting their families. As Hatch demonstrates in his own life, “retirement” doesn’t necessarily mean that older adults stop working, though even in the case where incomes continue, there are still barriers to their accessing financial services. Largely, financial services available to help people either in the aging process or in their older years are either inadequate or non-existent.
Globally, four out of five older adults lack any form of pension, especially if they are at the base of the pyramid. In most lower-income countries, public pension systems are inadequate to secure minimum financial security. Hatch, who has been in the financial inclusion space since its microfinance beginnings, lamented that he has seen only a handful of programs or initiatives that are specifically geared toward the needs of older adults.
In the case of India, there’s a clear opportunity in MFIs offering micropensions. In 2009, India’s National Pension System extended beyond public employees to also encompass private workers. The majority of companies in the private sector with at least 20 staff were then required by law to take part in an employee-contribution/employer-matching savings and investment plan. However, according to statistics from the Indian Ministry of Labor and Employment, as of 2011 only 26 million people worked in the organized public and private sectors in India. The 433 million Indians then working at small organizations or through informal means weren’t covered by the law.
Albeit few, there are micropension success stories. Walter celebrated the successful conclusion of a five-year pilot micropension program through REDCAMIF. Implemented across Latin America through a network of microfinance institutions, the pension program proved that there is a demand, a use, and feasibility for micropensions in Latin America. With the successful conclusion of this program, Walter is launching a formal program, building on the success he has found over the past five years. Most microfinance institutions and organizations around the world, van Dullemen noted, must undergo a paradigm shift, adopting views of older adults as wise, experienced, and still productive members of their families and communities.
Micropensions are critical to addressing the issue of income security. In most parts of the world, older adults are not likely to have the resources to stop working. The income streams that older adults rely on often come from a variety of places, including work, assets already owned, and family. These sources are often informal.
The varied income strategies that older adults employ have implications for their financial services needs, especially since their expenses may be unpredictable. Along with pensions, savings and credit may be important for making sure that there are not significant income gaps. Insurance is critical to mitigating financial shocks, especially those related to health.
I was encouraged to remember that as early as 60 years ago, the world was convinced that customers at the base of the pyramid were unworthy of or unable to use financial services. The very fact that over 900 people from 75 countries were gathered in Merida, Mexico to discuss microfinance is evidence that we have overcome this myth. Perhaps the Microcredit Summit can put its formidable awareness-raising strengths to work proving that older adults are also deserving of financial services and capable of using them.
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