Source: The post India needs an inclusive and sustainable pension system now has been created, based on the article “India needs to design an inclusive pension system” published in “The Hindu” on 18 June 2025. India needs an inclusive and sustainable pension system now.
UPSC Syllabus Topic: GS Paper2- Governance- social Security
Context: India’s pension system is narrow in scope and fragmented. With rising old-age dependency and a dominant informal sector, the country faces a looming pension crisis. This discussion stems from the Economic Survey 2025–26, which highlights low pension assets and insufficient coverage.
For detailed information on Indian Pension System- Significance and Challenges read this article here
Current Pension Landscape in India
- Low Pension Asset Base: India’s pension assets equal only 17% of GDP, far below the 80% seen in advanced economies. This weak base is insufficient for long-term retirement security.
- Limited Workforce Coverage: Only about 12% of India’s workforce is covered by formal pension schemes, mainly in the public and organised private sectors. Informal workers remain largely outside this net.
- Minimal Reach of Voluntary Schemes: Schemes like the National Pension System and Atal Pension Yojana are voluntary and cover just 5.3% of the population as of FY24. These offer limited protection to informal workers.
Exclusion of the Informal Sector
- High Contribution, Low Security: Informal workers, making up 85% of the workforce and over half of GDP, lack pension coverage. Their exclusion threatens social stability as India’s old-age dependency ratio is set to reach 30% by 2050.
- Fragmented Schemes and Policy Gaps: Multiple pension schemes exist, but none provide full coverage to informal or gig workers. Government efforts, such as aggregator-funded social security, address only a small portion.
- Global Examples of Inclusion: Countries like Japan offer mandatory flat-rate schemes for all adults. New Zealand provides universal pensions for residents over 65. These models support inclusive retirement systems.
Challenges of Sensitisation and Accessibility
- Low Financial Literacy: Awareness of pensions is poor in India. With most schemes being voluntary, lack of financial knowledge limits their uptake.
- Successful Global Approaches: Australia teaches superannuation in schools. The UK uses an opt-out enrolment system. Both promote early awareness and broader participation.
- Digital and Transparent Systems: The Netherlands provides annual pension disclosures. Nigeria has built digital pension systems for wider access. These improve public trust and accessibility.
Ensuring Fund Sustainability and Returns
- Low System Adequacy: India scores 44% in the Mercer CFA Global Pension Index 2024, with a sharp drop in adequacy. Pension fund liquidity and performance need urgent reform.
- Private Fund Support Needed: China struggles to sustain pensions without private funding. Countries like Denmark and Australia rely on private funds to complement public schemes.
- Secure Investment Practices: The US ensures pension fund returns through targeted debt investments. India must adopt similar models to protect fund stability.
Proposed Three-Tiered Pension Framework
- Tiered Pension System Design: A unified regulatory system should integrate existing fragmented schemes. Tier one would offer a flat-rate mandatory pension for all. Tier two would include employer-linked schemes with auto-enrolment. Tier three would be voluntary, offering tax and return-based incentives.
- Supportive Ecosystem Enhancements: Key reforms include digital enrolment, mandatory benefit disclosures, and targeted awareness drives in schools and colleges. These measures can boost participation and long-term trust.
- Safeguarding Retirement Security: A structured, inclusive pension framework is vital for managing India’s demographic transition. A minimum pension guarantee for all, including informal workers, will ensure financial security and dignity in retirement.
Question for practice:
Examine the key challenges and proposed solutions for creating an inclusive and sustainable pension system in India.
