Here’s why only one-third of Indians are saving for their retirement

• A new report by HSBC shows that only 33% of India regularly save for their retirement.
• As per the life-cycle theory, India’s saving rate should be much higher since most of its demographic dividend consists of working individuals.
  
• While low financial literacy may be the primary factor for a low savings rate, there are larger shifts in India’s saving patterns that help explain why individuals aren’t saving as much as they should be.

Lack of financial literacy has widened the gap between financial preparedness and financial risks in India. According to a report by HSBC titled ‘Future of Retirement: Bridging the Gap’, only 33% of Indians save regularly for their retirement. And, the problem isn’t specific to India either. Even globally, only one-third of the working demographic has a financial plan in place for their future.

The report cites low knowledge of how much is money is needed for retirement as the key reason behind why individuals prioritise their current expenditures over hedging for post-retirement expenses.

While financial literacy definitely has a part to play, there are other underlying reasons and trends that have resulted in the current paradigm.

India’s changing saving patterns

The fundamental trend of savings in India has shifted from financial securities to savings in physical properties. Looking at historical data, this shift could be attributed to falling interest rates and rates of return.

That being said, the increase in individual responsibility and life expectancy have led to a drastic change in the saving requirements for Indians over the past couple of years.

One major factor of influence has been the transfer of risk from the government to employers and individuals. State-supported pensions have been cut from most sectors, making individuals responsible for their own financial security after retirement. In that shift, a lot of people are now unaware of their own financial risk and lack the knowledge of how to protect themselves against it.

And, while there are a number of financial products and services in the market, the options have become so specialised and diverse that consumers are often uncertain about where to invest. The variety of instruments also adds to the decision-making process and the perceived risk attached. Innovations and the variety of financial instruments is only a boon if consumers understand how they work and what their benefits are.

Diversification and specialisation also entail an increase in competition between financial institutions in the market. Where there are more avenues to save, there are also new avenues to borrow. Getting credit is easier and more attractive when conservative financial instruments yield a low rate of return that doesn’t necessarily keep up with the rate of inflation.

According to the life-cycle theory, individuals save more during their working years. Initiatives like Project Financial Literacy, ABHAY, and Aflatoon are already underway, helmed by the Reserve Bank of India, public-sector banks, and NGOs respectively to improve financial literacy. But, considering that India’s median age is 27, the savings rate for retirement still needs to be higher than where it currently stands.