With more than 50% of its current population under 25 years of age, India's great "demographic dividend" needs to change a few habits--immediately--or it might be too late.

India is on its way to becoming the most populous nation in the world by 2025, surpassing China. By 2050, the number of Indians older than 65 will cross 200 million from about 80 million currently, while the number of Indians older than 80 will be at 43 million, second only to China.

According to a survey by HSBC titled, "The Future of Retirement--It's Time to Prepare," by 2050 India's elderly will equal the number of its children for the first time ever. Furthermore, a United Nations study points out that, in line with the global trend of increased life expectancies and declining fertility rates, old-age dependency ratios will increase, particularly in developing countries like India.

Quite clearly, greater resources will need to be set aside for the elderly. There is a "significant requirement for retirement planning, both at the individual level and for the Indian population as a whole," says Canara HSBC OBC Life Insurance's appointed actuary Chirag Rathod. "This requires increased awareness as a society about the need for proper retirement planning and the real threat of outliving your savings."

Given the sheer scale of this impending demographic shift, India's plan--or the lack of one--to take care of its elderly deserves a closer look.

Current Retirement AccountsIndia doesn't currently have a broad Social Security plan like the United States, but policymakers have created some retirement-focused savings vehicles.

Established in the 1950s, the Employees Provident Fund is most similar to the U.S. Social Security program, but its coverage is much more limited. Participation is compulsory only for employers with 20 or more workers and for workers who have a basic salary of more than INR 6,291 per month. Both employee and employer contribute an equal amount (either 12% of basic salary or INR 780) to the individual's EPF account, on which participants get a fixed interest rate. The EPF falls under the purview of the Employees Provident Fund Organisation, which has traditionally given the responsibility of managing these funds to state-owned or government-backed lenders.

The EPF is not without its problems. The first is reach: It covers only the organized, formally employed segment of the working population, while the vast majority of Indians--including entrepreneurs, self-employed businessmen, the agricultural labor force, and others--work in the so-called unorganized sector. In addition, even though the government offered a high interest rate in the early years of the plan, yields have since come down. Although the EFP's automatic contributions instill investing discipline on workers, participants can withdraw their savings after leaving their current job in lieu of transferring their account to their next employer, in the process dealing a big blow to their retirement savings potential.

In a move away from the defined benefit EPF, the Indian government established the National Pension Scheme in 2009 in an attempt to create a defined-contribution plan along the lines of the 401(k) in the United States. However, unlike the 401(k), which is offered through employers in the U.S., any Indian citizen between 18 and 60 years of age can invest in the NPS, which is administered to individuals through point-of-presence service provider outlets, which act as collection points.

NPS participants can exercise some control over how their contributions are invested. The government has defined three asset classes: 1) E--high return/high risk, which invests in predominantly equity market instruments; 2) C--medium return/medium risk, which invests in predominantly fixed-income instruments; and 3) G--low return/low risk, which invests in purely fixed-income instruments. Participants can choose to invest their entire amount in the C or G asset classes, but only up to a maximum of 50% in equity (class E). In case participants are unwilling or unable to exercise a choice regarding their investment strategy, funds are invested in accordance with an auto-choice option across the asset classes in percentage allocations prescribed by the Pension Fund Regulatory Development Authority depending on the participant's age.

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For India, Time for Retirement Planning Is Now