India’s Pension Challenge: Bridging Gaps for a Secure Retirement Future

Context:

Pensions are fundamental to ensuring economic security and dignity for the elderly. In retirement, individuals face reduced income, rising healthcare expenses, and inflation, making pensions a necessity rather than a luxury.

Despite rapid economic growth, India’s pension system remains underdeveloped and exclusionary, especially for the informal sector, which forms the bulk of the labour force.

To achieve the goal of becoming a developed economy by 2047, India must adopt a sustainable and inclusive pension policy that addresses current gaps and future challenges.

India’s Pension Landscape: Gaps and Inequities

• As per the Economic Survey 2025–26, only 12% of India’s workforce is covered by formal pension schemes.

• Public sector and organized private sector workers benefit from overlapping schemes.

• In contrast, informal sector workers—making up 85% of the labour force and contributing over 50% of the GDP—are largely excluded.

• Informal workers can only access voluntary schemes like the National Pension System (NPS) and Atal Pension Yojana (APY), covering just 5.3% of the population.

This results in:

• A fragmented and inefficient pension architecture.

• Lack of scalability and transparency.

• A system that does not reflect the changing nature of the workforce, such as the rise of gig and platform-based jobs.

Without reform, India risks a retirement poverty crisis, especially with the old-age dependency ratio projected to reach 30% by 2050.

Challenges in Expanding Pension Coverage

1. Scalability

• India's pension schemes are narrowly targeted, leading to overlapping and parallel systems.

• For instance, gig platforms are mandated to contribute to social security, but these efforts lack integration into a centralized framework.

• Developed countries like Japan and New Zealand use universal, flat-rate pensions applicable to all workers regardless of employment type.

2. Sensitisation and Accessibility

• Pension literacy remains low, particularly among rural and informal workers.

• The voluntary nature of schemes like APY and NPS results in low participation without awareness drives or behavioural incentives.

International best practices:

• Australia integrates retirement planning into the school curriculum.

• Netherlands mandates annual pension disclosures.

• The UK uses an opt-out enrolment system to boost participation.

• Nigeria leverages digital platforms for easier enrolment and wider reach.

3. Sustainability

• Ensuring the long-term financial health of pension funds is essential.

• According to the Mercer CFA Institute Global Pension Index 2024, India’s pension system scored only 44%, with low adequacy ratings.

• Even China, with broader coverage, faces sustainability challenges due to over-reliance on public funds.

• Countries like the US, Denmark, and Australia have successfully included private sector funds and adopt diversified investment strategies for better returns.

Proposed Solution: A Three-Tiered Pension Framework

To ensure comprehensive coverage and financial security, India must adopt a three-tiered pension model:

Tier I: Universal Basic Pension

• Flat-rate, mandatory pension for all citizens, regardless of employment status.

• Funded through a mix of government support and modest individual contributions.

Tier II: Occupational or Employer-Based Schemes

• Mandatory or auto-enrolment schemes for both formal and informal workers.

• Encourages shared contributions by employers and employees.

Tier III: Voluntary Pension Savings

• Flexible, tax-incentivised schemes offering market-linked returns.

• Designed to supplement basic retirement income.

Complementary steps include:

• Nationwide financial literacy campaigns integrated into school and college education.

• Digital pension portals with simple interfaces for enrolment and fund tracking.

• Annual disclosures of pension entitlements to improve transparency.

• Regulatory reforms to ensure sound investment of pension funds and long-term liquidity.

Conclusion: A Call for Urgent Reform

India is experiencing a demographic shift with a growing elderly population. Without major reforms, the country faces a rising risk of old-age poverty and social insecurity.

A reimagined, inclusive, and sustainable pension system, especially one that includes the informal sector, is essential for realising the vision of a developed India by 2047.

Building a pension framework based on universal access, financial resilience, and public trust will not only protect future retirees but also strengthen India's socio-economic foundations for generations.