The evolution of pension reforms in India

Source: The post “The evolution of pension reforms in India” has been created, based on “The evolution of pension reforms in India” published in “The Hindu” on 08th December 2025.

UPSC Syllabus: GS Paper-3-  Economy

Context: India is undergoing a rapid demographic shift, with the elderly population of 153 million in 2025 expected to reach 347 million by 2050, creating a major pension and social security challenge. Pension reforms in India have gradually transitioned from welfare-based support to contributory and inclusion-focused frameworks, especially targeting informal sector workers.

Evolution of Pension Reforms in India

A. Welfare-Based Social Assistance Phase

1. The Indira Gandhi National Old Age Pension Scheme (IGNOAPS), introduced in 1995, was designed to provide a direct, regular income to persons above 65 living below the poverty line.
2. This scheme expanded over time, becoming the first nationwide financial support mechanism for elderly individuals in the unorganised sector.
3. The Old Pension Scheme (OPS) covered government employees by offering defined benefits, although it later became fiscally unsustainable.

B. Contributory and Financial Inclusion Phase

1. The New Pension Scheme (NPS), launched in 2004, replaced OPS and introduced a market-linked, contributory model for formal sector employees.
2. The corporate NPS model extended pension coverage to private sector workers by allowing them to open voluntary pension accounts.
3. The Atal Pension Yojana (APY), introduced in 2015-16, offered informal sector workers a contributory pension plan with flexible payment intervals to account for seasonal income fluctuations.
4. APY ensured a guaranteed minimum pension if investment returns fell short, encouraging formal savings behaviour among low-income households.

C. Recent Pension Innovations

1. The NPS 2.0 reform allowed subscribers to invest up to 100% in equity and introduced a flexible Multi-Scheme Framework, making it attractive for younger and higher-risk investors.
2. The new Labour Codes introduced a uniform definition of wages, ensuring that basic pay constitutes at least 50% of total salary, which increases pension and gratuity contributions and enhances long-term financial security for workers.

Inclusion Measures for Informal Sector Workers

1. The government launched the e-SHRAM portal to create a national database of informal sector workers and provide them with information about pension and social security schemes.
2. The Longitudinal Ageing Survey of India shows that 42% of people over 55 remain unaware of NPS eligibility criteria, which highlights the need for greater awareness.
3. The digital divide continues to pose challenges because 63% of elderly citizens do not know how to use the Internet, limiting their ability to register for schemes on their own.
4. Registration requirements such as Aadhaar-mobile linkage and bank accounts also create risks of exclusion for vulnerable groups.

Analytical Perspective

1. Pension reforms have progressed in a hierarchical manner, with each stage addressing gaps identified in earlier approaches to elderly welfare.
2. The early focus on welfare through IGNOAPS and OPS was followed by the introduction of savings-driven schemes such as NPS and APY, which aimed to strengthen financial inclusion.
3. Recent reforms, including e-SHRAM and NPS 2.0, show a shift towards a data-driven, participatory system that integrates informal workers into formal financial structures.

Key Challenges in India’s Pension Framework

1. India continues to face low awareness about pension schemes among informal-sector and rural populations, which prevents eligible elderly individuals from enrolling.
2. The predominance of informal employment, where workers have irregular incomes, makes it difficult for them to commit to consistent contributions under schemes like APY.
3. Digital barriers and weak financial literacy hinder effective utilisation of technology-driven platforms such as e-SHRAM and NPS online services.
4. Administrative challenges such as errors in Aadhaar linkage, banking access, and verification processes create delays and exclusion from benefits.
5. Fragmented implementation across States leads to uneven coverage and inconsistent pension disbursements.
6. The guaranteed pension amounts under some schemes remain low relative to rising living costs, which reduces the adequacy of social protection.

Way Forward

1. The government should strengthen awareness campaigns through community workers, local bodies, and financial literacy programmes to ensure that all eligible groups understand pension schemes.
2. Pension contributions for informal-sector workers can be made more flexible by allowing micro-contributions and government co-contribution for the poorest households.
3. Digital infrastructure must be enhanced by providing assisted digital services at CSCs, panchayat offices, and post offices to overcome digital illiteracy barriers.
4. The e-SHRAM platform should be integrated with NPS and APY to create seamless enrolment, automatic eligibility verification, and timely benefit delivery.
5. Pension adequacy needs improvement through periodic revisions of benefit amounts based on inflation and elderly care costs.
6. Stronger monitoring mechanisms and grievance redressal systems should be instituted to prevent exclusion errors and ensure transparent disbursement.

Conclusion

The evolution of India’s pension system marks a decisive movement from state-supported welfare schemes towards contributory and inclusion-based financial security models. Despite challenges such as limited awareness and digital exclusion, ongoing reforms offer a strong foundation for improving the dignity and economic security of India’s rapidly growing elderly population. Ensuring widespread awareness, digital support, and effective last-mile delivery will be essential for achieving a universal and robust pension system.

Question: “The evolution of pension reforms in India reflects a shift from welfare-based social assistance towards a participatory financial inclusion framework.” Discuss.