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India’s Pension Reform
India needs to design an inclusive pension system
Context: Pensions play a critical role in ensuring financial stability and dignity after retirement, particularly in a country like India where economic vulnerability intensifies with age.
Present Status in India
- With rising healthcare expenses, inflation, and limited income-generating options, the need for a robust pension framework is more urgent than ever.
- However, India’s pension system remains underdeveloped and unevenly distributed.
- According to the Economic Survey 2025–26, Indian pension assets account for just 17% of GDP—far below the 60–80% seen in many advanced economies.
- Alarmingly, only about 12% of the Indian workforce is covered by formal pension schemes.
- Public sector and organised private sector employees enjoy relatively comprehensive protection, but the informal sector, which comprises nearly 85% of India’s workforce, remains largely outside the safety net.
Informal Sector and the Pension Coverage Gap
- India’s informal workforce contributes more than half of the country’s GDP, and its exclusion from pension schemes is both a policy oversight and a looming financial crisis.
- With the old-age dependency ratio expected to hit 30% by 2050, failing to integrate the informal sector into the pension system will hinder India’s goal of becoming a developed economy by 2047.
- Currently, voluntary pension schemes like the National Pension System (NPS) and Atal Pension Yojana (APY) offer limited coverage—only about 5.3% of the total population as of FY24.
- The lack of mandatory participation, low awareness, and fragmented delivery mechanisms have stunted wider adoption.
Global Lessons: Building a Structured and Scalable Pension System
India can draw lessons from countries with inclusive, scalable pension ecosystems:
- Japan: Japan runs a compulsory, flat-rate contributory scheme for all residents aged 20 to 59, covering both formal and informal workers.
- New Zealand: New Zealand offers a universal flat-rate pension for those over 65, provided they meet a 10-year residency requirement.
- UK: The UK has adopted an opt-out pension system for employees, effectively encouraging participation by default.
- Nigeria: Nigeria has scaled pension access through an expansive digital infrastructure, boosting informal sector inclusion.
Financial Literacy and Accessibility Are Key
- Low financial literacy continues to hamper pension adoption in India.
- To address this, targeted educational campaigns at the grassroots level are critical.
- For instance, Australia integrates superannuation planning into its school curriculum, while the Netherlands ensures annual disclosure of pension entitlements by occupational pension funds.
- Further, simplified digital enrolment systems and mobile-friendly platforms can boost accessibility for gig workers, self-employed individuals, and other informal sector participants.
Ensuring Sustainability and Adequacy of Pension Funds
- The Mercer CFA Institute Global Pension Index 2024 rated India’s pension system at just 44%, with a sharp decline in the adequacy sub-index.
- To address these concerns, India must focus on strengthening both public and private pension funds.
- China’s experience shows that reliance on public pensions alone is risky without supplemental private funds.
- On the other hand, countries like Denmark, the Netherlands, Australia, and the US use private and occupational pension investments to bolster public systems and ensure long-term sustainability.
A Three-Tier Pension Framework for India
To overcome the challenges of scalability, sensitisation, and sustainability, India should move towards a unified, three-tier pension structure:
- Tier 1 (Mandatory Basic Pension Guarantee): A flat-rate, contributory pension scheme covering all citizens, regardless of occupation.
- Tier 2 (Occupational and Employer-Based Pensions): Auto-enrolment schemes for workers in formal and informal settings, with employer contributions and opt-out options.
- Tier 3 (Voluntary Retirement Savings): Tax-incentivised and flexible investment options to complement the core pension.
- A unified pension regulator would ensure harmonisation, accountability, and smoother integration across schemes.
Way Forward
With a rapidly ageing population, India must act now to ensure that every worker—formal or informal—has access to retirement security. Policymakers must prioritise:
- Designing an inclusive, tiered pension architecture
- Launching national-level financial literacy initiatives
- Creating easy-to-use digital enrolment systems
- Strengthening regulations for pension fund investments and disclosures
A minimum pension guarantee, backed by smart policy reforms and global best practices, will secure the future of India’s ageing workforce and fortify its economic aspirations.
