India : Demographic dividend or Longevity malaise ?

The State Bank of India (SBI) is one of the largest employers in the country having228,296 employees and is also the largest lender in India with 14,816 bank branches of which 9,851 (66%) were in Rural and Semi-urban areas.  The SBI has decided to set aside Rs. 24 billion for the year 2014 to meet the pension liabilities and has simultaneously revised upwards the actuarial Life Expectancy (LE) of its pensioners from 76 years to 81 years.  In 2014 SBI’s net profit was Rs. 34 billion- that is 70% of the net profit is being kept aside towards pension liabilities.  Although, the average age of the 228,000- plus people who make up SBI is 48 years, the median age is likely to be higher, 50 years.  That means with retirements, there will be nearly 8,000 in 2015and a similar number every year after that, significant proportion of the future profits would go towards paying the pension liabilities.  The risks due to longevity will build slowly over time, and if not addressed soon could have large detrimental effects on already weakened balance sheet of SBI, making them vulnerable to more shocks and potentially affecting financial stability. SBI’s increased liability due to longevity isjust a microcosm of the similar problem that India needs to address in not too distant future.

The International Monetary fund (IMF) discusses the financial implications of longevity risk(IMF (2012)) and states that if an individual lives 3 years longer than expected, the already large cost of aging can increase by another50% in case of advanced economies and by 25% in the case of emerging economies.  While the impact of this longevity extension has on pension liabilities varies according to interest rate levels and the specific demographics of each individual pension plan, every year of additional life expectancy is generally thought to add about 4% to the present value of pension obligations for a typical pension fund.

The data from the World Health Organisation(WHO (2013)) states that the average LE at birth for Indian males is 66 years and that for females is 70 years. According to the report,
 a person retiring at age 60, however, is on average likely to live for another15.72 years (Males) and 17.69 years (Females), the average being 16.69 years. By extending the LE for its retired from 76 years to 81 years, SBI has implicitly recognised the superior medical condition of its retirees. Thus a 60 year old SBI banker is expected to live for 21 years that is almost 5 years longer than a normal 60 year old Indian. But, still less than the average 60 year olds from Japan (25.5 years), Singapore (24.64 years), UK (23.58 years), and US (23 years).
 Although it does seem that Indian Seniors have a long way to catch up, however, with better sanitation, food and old-age care a large proportion of the elderly population will reach the global standards within one generation. And therefore,  the rising cost due to the increase in old-age demographics in general and people living longer in particular is something public policy decision-makers in India have to consider sooner than expected.

To appreciate the scale of the future problem faced by India consider a simple calculation.  Currently, 9 %  (108 million) of the Indian population (total 1.2 billion) are above 60 years old.  If the government were to spent towards the health care and social service cost of at least $ 2 per senior person per day (assume 365 days in the year), the total figure per year 108 x 2 x 365 = $ 79 billion. The cost would be 4.29% of its current GDP (2013) of $ 1.842 trillion. By 2050, 20% of the Indian population would be aged 60 years and above. Based on the projected population of 1.6 billion, around 320 million Indians would be over 60 years old. Healthcare cost would be $ 234 billion (320 x365) and this number is not adjusted for inflation. To maintain constant the expense at the conservative load of 4.29% of GDP of India, the GDP should increase to234/0.0429=5.45 trillion in 2050. The GDP would need to grow by at least 9.75% per year till 2050 ! Over the last 10 years never has India’s GDP exceeded 9.75%.

The life expectancy at birth in India climbed from low 20s years in 1950 to 65 years in 2011, reflecting declines in infant mortality and survival at older ages in response to public health improvements. Therefore over 61 years (1950 to 2011) the LE has increased by 9 months per calendar year. The increasing longevity has lead to a rapid increase in the elderly population while low fertility has slowed the growth of the working-age (15-59 age group) population. Most of these elderly citizens come from India’s 300 million strong middle-class or more affluent groups, where better long-term nutrition and healthcare has extended lifespans far beyond the current national average of 66 years.

The growth rates among the elderly (60+ years) since 1950, were much higher than that of the general population growth rate. Whereas the general population grew at 2% per annum, those aged 60+years grew at 2.78% per year. India has had significantly less time as compared to developed countries to accommodate the sudden rise in the number of the senior citizens. In 2000, 7% of India’s population or about 73 million were over 60 years old by the year 2042 about 14% of projected population is 1.6 bln, that is about 224 million people. India’s transition to a society with significant old-age population will happen in three decades, compared to Europe, which has aged gradually over the past 100 years.

  1. IMF (2012), Global financial stability report, in ‘World Economic and Financial Surveys’, pp. 29–45.
  2. WHO (2013), ‘Office of management and budget’,