India’s Pension System: Challenges & Solutions

Context (TH): India faces a looming demographic challenge as the old-age dependency ratio is projected to reach 30% by 2050, making an inclusive pension system a critical policy need.

India’s Pension Coverage: Status

Low Pension Coverage: India’s pension assets account for only 17% of its GDP, significantly lower than the 80% in advanced economies.
Skewed Benefits: Benefits are heavily concentrated in the public and organised private sectors.
Limited Formal Sector Reach: Only about 12% of the workforce is covered by formal pension schemes. The vast informal sector, i.e. 85% of the labour force, over half of GDP, is largely excluded from pension coverage.
Limited Uptake of Voluntary Schemes: Voluntary schemes like the National Pension System (NPS) and Atal Pension Yojana (APY) covered only 5.3% of the total population in FY24.
Risk of Future Financial Crisis: The widespread exclusion of informal workers is a significant policy failure that could lead to a future financial crisis.

Fragmentation: The pension system is fragmented with overlapping schemes, especially for informal and gig workers. This adds complexity and limits scalability.
Low & Unstable Incomes: Make it difficult for many workers to contribute regularly to pension schemes.
Low Awareness: Financial literacy remains low. Voluntary pension schemes require awareness and trust, both of which are lacking in rural and unorganized sectors.
Sustainability Issues: The Mercer CFA Global Pension Index 2024 rated India’s pension system at 44%, with significant concerns around adequacy and long-term liquidity.
Exclusion of Women & Marginalized Groups: Gender disparities in workforce participation and income limit women’s access to pension benefits. Similar exclusion exists for tribal populations and migrant workers.
Administrative and Technical Hurdles: Enrolment, KYC, and digital access barriers prevent seamless onboarding and management of pension accounts.

Unified Pension Scheme: Combines features of the old and new pension schemes, offering family pensions, minimum guaranteed amounts, and a pension equal to 50% of their last drawn salary.
Pradhan Mantri Shram Yogi Maandhan: It is a voluntary and contributory pension scheme for the unorganised sector. It offers a minimum monthly pension of ₹3,000 after the age of 60 for workers.
Atal Pension Yojana: Focuses on unorganized sector workers. It offers a guaranteed pension of ₹1,000 to ₹5,000 per month after age 60 based on contribution.
National Pension System (NPS): It is a voluntary, defined-contribution retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Japan: Operates a mandatory flat-rate contributory scheme for all residents aged 20 to 59 years, covering diverse employment statuses.
New Zealand: Offers a universal, flat-rate public pension to residents aged 65 and over, with a 10-year residency requirement.
Australia: Integrates superannuation planning into its school curriculum, promoting early financial literacy.

Conduct financial literacy campaigns in schools and colleges, focusing on retirement planning.
Develop user-friendly digital platforms for enrolment, contribution tracking, and disclosures (leveraging UPI’s success).
Mandate regular and transparent annual disclosures of pension entitlements.
Implement strong investment regulations and oversight to monitor fund performance and ensure liquidity.
Unified Three-Tier Pension System to overcome structural issues:
- Tier I: Mandatory basic flat-rate contributory pension for all, irrespective of job status.
- Tier II: Employer-based occupational pensions with auto-enrolment.
- Tier III: Voluntary pension savings incentivized through tax rebates, market-linked returns etc.