India must build pensions that are adequate, sustainable, and accessible without burdening the budget. Recent EPFO changes move from control to trust and can support lifetime, Aadhaar-linked Citizen Social Security Accounts (CSSA). India’s pension system currently holds a D grade (43.8/100) in the 2025 Global Pension Index, showing weak adequacy, low sustainability, and narrow coverage. The goal is to convert these reforms and design ideas into lower costs, wider coverage, and better service. PF Reforms Enable Social Security.
About Pension Funds
- Three pillars
- Pensions are income for old age, built on three pillars—government, employers, and individuals.
• Ageing exposes different gaps across countries: Europe must invest more, America must save more, and China must consume more.
• India needs all three actions together. Strong pillars raise old-age income, deepen domestic investment pools, and support formal non-farm jobs. - Well-designed pensions strengthen public finances by building savings instead of relying on unfunded promises.
- Fiscal lessons from history
- Public pensions began under Bismarck’s Germany, once promising benefits near twice life expectancy. Now, some European systems start at almost half of life expectancy. Such unfunded promises become off-balance-sheet debt, repaid later through taxes or inflation.
- With India’s public debt near 85% of GDP, large government-funded pensions are unaffordable. India must rely on sound design, wider participation, and disciplined funding rather than new fiscal commitments.
Challenge to Government Pension Fund
- Low global standing: India scores 43.8/100 (grade D) in the 2025 Mercer–CFA Global Pension Index, signalling weak adequacy, sustainability, and integrity.
- Unequal coverage: About 85–90% of workers are in the informal sector and lack formal retirement benefits, keeping overall adequacy low.
- Fiscal and demographic strain: Rising life expectancy and limited fiscal space make future obligations hard to fund without structural changes and wider participation.
- Fragmented architecture: EPS, EPFO provident fund, employer DC plans, and government-backed options operate in silos, diluting coherence, portability, and scale benefits for savers.
- Governance and investment limits: Fragmented oversight, limited disclosure, and restricted investment flexibility reduce performance and trust.
- Participation and trust deficit: Complex processes and uneven service discourage enrollment and persistence, weakening contributions and long-term savings discipline significantly.
Recent Changes to EPFO
- From control to trust: EPFO is moving away from rule-heavy control toward member trust, making access simpler while protecting long-term savings.
- Simpler categories: 13 withdrawal reasons are consolidated into 3 groups, removing confusion for workers and employers. Three groups are:
- Essential needs: Members can withdraw for education, marriage, and medical emergencies, recognising unavoidable household expenses.
- Housing: Withdrawals are permitted to purchase or construct a home, supporting long-term asset creation.
- Special cases: Retirement, permanent disability, retrenchment, voluntary retirement, and permanent relocation abroad allow specific or full withdrawals.
3.Withdrawal limits
- Partial withdrawals are capped at 75% to balance flexibility with future security.
- Full withdrawals: Full access is allowed only for retirement, permanent disability, or permanent relocation abroad.
- Waiting periods: The post-exit wait is now 12 months for defined contribution balances and 36 months for defined benefit balances to curb impulsive withdrawals.
- Compounding protection
- Minimum balance: Members must retain at least 25% of their corpus, preserving compounding and sustainability.
- Digital infrastructure: Claims up to ₹5 lakh are auto-settled, a unified passbook is available, and pensioners can use digital life certificates.
- Foundation for CSSA: The new design positions EPFO to evolve into a lifetime, Aadhaar-linked CSSA that can accept contributions from government, employers, and individuals. Seamless balance portability and employee choice are central, alongside competition with NPS to improve price and service.
Different Pension Schemes in India
| Pension Scheme | Applicability | Features |
| Old Pension Scheme (OPS) | Applicable to all government employees appointed before January 1, 2004. | a. It is a ‘defined benefit scheme‘ as the government employees were paid 50% of their last drawn salary plus Dearness Allowance (DA) as pension after their retirement. b. Under this scheme, the entire pension amount was borne by the government while fixed returns were guaranteed for employee contribution to the General Provident Fund (GPF). |
| National Pension System (NPS)
| a. Introduced on January 1, 2004. All central government employees joining after January 1, 2004, were compulsorily enrolled in NPS b. It was voluntary for the state governments to join the NPS. Almost all the states except for West Bengal and Tamil Nadu migrated to the NPS. c. Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh announced a shift back to the OPS. | a. The scheme is a “defined contribution scheme” as the government employees have to make defined contribution of 10% of basic pay and dearness allowance (DA). There is matching contribution by the government. b. There is no defined benefit. The pension benefit is determined by factors such as the amount of contribution made, the age of joining, the type of investment and the income drawn from that investment. c. It remained voluntary for the workforce in the unorganized sector. |
| Unified Pension Scheme
| a. It will be applicable from April 1, 2025 to all those who have retired under the NPS from 2004 onwards. b. Employees can still opt to remain under the NPS. c. Currently for central government employees, but states can also adopt it.
| a. It is an assured Pension Scheme and does not leave things to vagaries of market forces. b. The structure of Unified Pension Scheme (UPS) has the best elements of both OPS and NPS. Like OPS, it provides an assured pension and, like NPS, it has provisions of employee contribution to the pension corpus. c. The UPS is a funded contributory scheme, while the OPS is an unfunded non-contributory scheme. |
Way forward
- Cost discipline: EPFO’s charge is 4% of contributions, about ten times an equivalent government securities fund from SBI. Transparent, benchmarked pricing can curb Baumol-style cost disease.( when work stays manual, wages rise but productivity doesn’t, so fees stay high.)
- Separate roles: EPFO currently combines policymaker, regulator, and provider roles. Separating these roles can drive better prices and service and also improves accountability and reduces conflicts.
- Bring competition: Let employees choose between EPFO and NPS. Selection at joining and an annual switch window will pressure providers to cut costs and improve service. Interoperability must be seamless throughout.
- Employee control: Salary belongs to employees. Allow them to decide on the 12% contribution and to opt out of diverting 8.33% of the employer’s 12% to EPS.
- Universal CSSA:Convergence of EPFO, NPS, Atal Pension Yojana, PM-SYM, PMVVY, and SCSS into CSSA can target universal social security by India@100. Aadhaar linkage, portability, and interoperability can unify contributions and entitlements over a lifetime and raise trust. One account simplifies saving and tracking.
- Portability and interoperability:Ensure balances move seamlessly across jobs and between EPFO and NPS. Frictionless transfers raise trust and keep savings intact.
- Expand coverage:
- Simplify enrolment and add smart incentives for informal workers. Wider participation improves adequacy and strengthens the system’s sustainability.
- Introduce a minimum income guarantee for the elderly who are most vulnerable. This closes harsh gaps while bigger reforms take root.
8.Stronger oversight:Improve regulation and disclosure. Allow prudent investment diversification to enhance returns while safeguarding integrity.
- Adopt best global practises:
Singapore (CPF). Singapore runs a compulsory, defined-contribution system that gives universal coverage. It follows prudent investment rules and relies minimally on government subsidies.
Netherlands. The Netherlands operates a well-funded, transparent, and sustainable pension system. It balances public and private participation to maintain stability and trust.
Iceland. Iceland also has a well-funded, transparent, and sustainable model. It uses a balanced public–private approach to support long-term reliability.
Conclusion
Recent EPFO reforms create a solid base for universal, fiscally responsible social security. India should separate roles, enable EPFO–NPS choice, cut costs, expand coverage, and merge schemes into CSSAwith full portability and employee control to achieve adequate, sustainable, trusted social security without new fiscal burdens.
Question for practice
- Discuss how recent reforms in the Employees’ Provident Fund Organisation (EPFO) can contribute to building a sustainable and inclusive pension system in India.
Source: Indian Express
