Context

• Pensions are a cornerstone of financial security and human dignity in old age and for retirees, reduced earning capacity, rising healthcare costs, and inflation create serious financial vulnerabilities, making pensions not just a benefit but a necessity.
• Despite being one of the world’s fastest-growing economies, India’s pension assets account for only 17% of GDP, far below the 70–80% coverage typical in advanced economies.
• This gap is particularly acute in the informal sector, which represents the majority of the workforce.
• As India aspires to become a developed economy by 2047, building a sustainable, inclusive pension system must be a policy imperative.

India’s Pension Landscape: Fragmented and Inadequate

• According to the Economic Survey 2025–26, only 12% of India’s workforce is enrolled in formal pension schemes.
• The current system disproportionately favours public sector and organized private sector workers through multiple overlapping schemes.
• In contrast, informal sector workers, who make up approximately 85% of the labour force and contribute over half of the GDP, are largely excluded.
• Their only access to retirement benefits comes through voluntary programs like the National Pension System (NPS) and the Atal Pension Yojana (APY), which together cover just 5.3% of the population.
• This fragmented architecture makes the system inefficient, opaque, and difficult to scale.
• Moreover, it fails to reflect the evolving realities of the labour market, particularly the rise of the gig economy and non-traditional employment arrangements.
• Without a comprehensive reform, India faces the risk of a retirement poverty crisis, especially as the old-age dependency ratio is projected to reach 30% by 2050.

Challenges to Expansion: Scalability, Sensitisation, and Sustainability

• Scalability
  • India’s existing pension schemes are fragmented and lack interoperability.
  • The proliferation of narrowly targeted schemes has made it difficult to scale the system
  • For example, while aggregators in the gig economy are mandated to contribute toward social security for their workers, this has added another parallel scheme instead of integrating into a unified structure.
  • In contrast, countries like Japan and New Zealand employ universal, flat-rate pension models that encompass a broad base of workers regardless of employment status.
• Sensitisation and Accessibility
  • Pension literacy remains low, especially among informal sector workers and rural populations.
  • The voluntary nature of most informal-sector schemes means that without targeted awareness campaigns and behavioural nudges, participation remains low.
  • International models provide valuable lessons:
    • Australia embeds retirement planning into its school curriculum.
    • The Netherlands ensures transparency through annual disclosures of pension entitlements.
    • The UK operates an opt-out pension scheme, encouraging automatic enrolment.
    • Nigeria has leveraged digital platforms to increase reach and simplify enrolment.
• Sustainability
  • Maintaining the financial health of pension funds is vital for long-term viability.
  • The Mercer CFA Institute Global Pension Index 2024 gave India’s pension system an overall rating of just 44%, with a particularly low adequacy score.
  • Even countries like China, despite their more expansive systems, are grappling with pension sustainability due to over-reliance on public funding.
  • In contrast, nations such as the United States, Denmark, and Australia integrate private sector pension funds into their overall retirement ecosystem, using diversified investment strategies including debt instruments for stable returns.

The Path Forward: A Three-Tiered Pension Framework

• Tier I: Universal Basic Pension: A flat-rate, mandatory pension for all citizens, regardless of employment type, funded through modest contributions and government support.
• Tier II: Occupational or Employer-Based Schemes: These would be either mandatory or have auto-enrolment features for employees in both the formal and informal sectors, with a shared contribution model.
• Tier III: Voluntary Pension Savings:
  • Individuals could opt into flexible, tax-incentivised schemes offering market-linked returns, to supplement their basic retirement income.
  • Complementary measures should include:
    • Nationwide financial literacy campaigns integrated into school and college curricula.
    • Transparent, digital pension portals with user-friendly interfaces for enrolment and tracking.
    • Annual pension disclosures for all participants.
    • Regulatory reforms to ensure prudent pension fund investments and long-term liquidity.

Conclusion

• India stands at a critical juncture and the demographic shift toward an aging population demands a swift overhaul of the country’s pension ecosystem.
• A reimagined, inclusive pension framework, especially one that integrates the informal sector, is essential to ensuring economic security in old age and achieving the vision of a developed India by 2047.
• A system based on universal access, financial sustainability, and public trust will not only protect retirees but also fortify the nation's socio-economic foundation for generations to come.