18 Jun 2025 : India needs to design an inclusive pension system

Editorial 1: ​India needs to design an inclusive pension system

Context

As India’s population changes, the government needs to create a pension system that includes and supports everyone.

Introduction

Pensions help retired people live with financial security and dignity when they stop working. After retirement, income drops while expenses like healthcare and inflation continue to rise, making a pension safety net important.

Current Pension Coverage in India

• According to the Economic Survey 2025–26, India’s pension savings are only 17% of its GDP, far behind developed countries where it reaches up to 80%.
• Only about 12% of Indian workers have formal pension coverage.
• Most support goes to government and organised sector workers, while informal workers rely on voluntary schemes like
  •  the National Pension System and Atal Pension Yojana, which covered just 5.3% of the total population in FY24.

Importance of Including Informal Workers in Pensions

• Around 85% of India’s informal labour force contributes to over half of the country’s GDP.
• As the gig economy grows, more workers are being left out of the current pension system.
• This exclusion is not just a policy gap but could lead to a serious financial crisis in the future.
• By 2050, India’s old-age dependency ratio (number of older people supported by working-age people) will rise to 30%.
• To become a developed economy by 2047, India must ensure old-age financial security for all.

Challenges in Expanding Pension Coverage

• Expansion is held back by problems in scalability, public awareness, and long-term sustainability.
• The main issue is the fragmented structure of pension schemes, especially for informal workers.
• Government schemes like the gig worker social security fund only cover a small portion of the informal workforce and add to the confusion.

Global Lessons in Inclusive Pension Systems

• Japan has a mandatory, flat-rate pension for all residents aged 20–59, including self-employed and farmers.
• New Zealand gives a universal pension to all citizens aged 65+, with a 10-year residency rule — nearly 40% of elderly people depend on it.
• These countries have clear, multi-tiered pension systems that serve the entire population.

Need for Awareness and Access

• In India, most pension schemes for informal workers are voluntary, so low awareness blocks participation.
• Financial literacy is low, and education on pensions needs to start from school level, like in Australia.
• Countries like the Netherlands send yearly pension updates to workers, keeping them informed.
• The UK uses an opt-out pension model, encouraging automatic participation.
• Nigeria has improved pension access by investing in digital infrastructure, making it easier for people to join and track their pensions.

Ensuring sustainability and liquidity

Key Reforms Needed for Pension Expansion

• India must address the three major challenges:
  Scalability, Sensitisation, and Sustainability.
• The first step is to unify all scattered pension schemes under a single regulator for better coordination.

Proposed Tiered Pension Structure

Additional Measures to Support the System

• Launch financial awareness campaigns in schools and colleges to build early understanding of pension planning.
• Create easy-to-use digital platforms for pension enrolment and tracking.
• Make it mandatory to issue annual pension entitlement statements to increase transparency.
• Introduce strict investment rules and oversight to keep pension funds liquid and well-managed for long-term needs.

Conclusion

As India’s population changes, it is important to provide a minimum pension for everyone, including informal workers. A clear and fair pension system will help ensure basic financial support after retirement. Policymakers need to act now to create a system that includes all types of workers, no matter what job they do.