India’s Pension System Needs Inclusive Overhaul

A recent editorial and data from the 2024 Mercer CFA Global Pension Index have reignited policy discussions around India's outdated and fragmented pension system. With only 12% of the workforce covered, and over 85% of labour in the informal sector, India faces the threat of mass old-age insecurity. The current pension architecture lacks inclusiveness, sustainability, and universality, and if not reformed now, may exacerbate poverty and dependency in the coming decades.

Table of Contents:

1. What is the Issue?

2. Background: Informality and the Pension Gap

3. Global Models for Learning

4. Proposed Three-Tiered Framework for India

5. Measures Needed to Improve Inclusivity

6. Benefits of Pension Reform

7. Challenges in Implementation

8. Way Forward

What is the Issue?

India’s pension architecture is currently marked by structural deficiencies:

• Coverage Gaps: A mere 12% of the workforce enjoys pension security. Public sector employees have formal pensions, while the vast majority in the informal sector remain uncovered.

• Voluntary Participation: Key schemes like the National Pension System (NPS) and the Atal Pension Yojana (APY) are optional. Due to low awareness and irregular incomes, participation among informal workers is negligible.

• Inequity and Fragmentation: Pension schemes are managed by multiple regulators, making access and portability difficult.

• Inadequacy of Benefits: Even for participants, pension returns are often too low to provide dignified retirement, reflecting poor adequacy in global benchmarks.

As India moves toward an ageing population structure, an unreformed pension system could result in a social and fiscal burden.

Background: Informality and the Pension Gap

• India’s labour force is overwhelmingly informal, including daily wage labourers, domestic workers, gig economy contributors, self-employed individuals, and farmers.

• The gig economy, especially post-pandemic, has grown rapidly. However, these workers are not legally entitled to pensions unless voluntarily enrolled.

• India’s old-age dependency ratio is projected to triple to 30% by 2050, meaning fewer workers will have to support a larger ageing population.

• Fragmented schemes - such as EPFO for formal employees, NPS for civil servants and subscribers, APY for low-income groups - lack coherence and regulatory unification.

• Lack of financial literacy and digital inclusion further alienates rural and unorganised workers from accessing pension services.

Global Models for Learning:

These examples demonstrate that universal coverage, automatic inclusion, and robust digital infrastructure are central to success.

Proposed Three-Tiered Pension Framework for India:

To move toward a comprehensive and inclusive pension model, India must adopt a three-tiered architecture:

Tier 1: Universal Basic Pension

• Funded by general taxation.

• Provides a minimum assured pension to every citizen above retirement age, regardless of employment history.

• Focus: Eradicate old-age poverty and ensure dignity.

Tier 2: Mandatory/Opt-Out Occupational Pensions

• Auto-enrolment of formal sector workers and gig/platform workers via employers/aggregators.

• Contribution shared by employer and employee.

• Could be integrated with EPFO or through a unified pension platform.

Tier 3: Voluntary, Flexible Retirement Savings

• Open to all individuals for enhanced retirement security.

• Government can incentivise savings through tax breaks and higher returns on long-term holding.

• Suitable for homemakers, farmers, and others with irregular income.

Measures Needed to Improve Pension Inclusivity:

1. Early Financial Literacy

   • Integrate basic concepts of pension and long-term savings into school, college, and community education.

   • Public campaigns via TV, radio, and social media.

2. Unified Digital Infrastructure

   • Leverage JAM trinity (Jan Dhan-Aadhaar-Mobile) for seamless enrolment, portability, and grievance redressal.

   • Create a Pension Dashboard Portal for every citizen to track entitlements.

3. Transparent Grievance Redressal

   • One-stop helpdesk at district/block levels.

   • Use AI-chatbot and mobile helplines to address low digital literacy.

4. Integration of Gig Platforms

   • Mandate gig platforms like Zomato, Ola, Swiggy to contribute a fixed percentage to workers’ pensions.

   • Provide platform-linked auto-enrolment with matching government incentives.

5. Regulate Private Pension Funds

   • Strengthen oversight by PFRDA.

   • Ensure low charges, safe investments, and performance-linked ratings of pension funds.

Benefits of a Reformed Pension Ecosystem:

• Old-age Security: Reduces risk of post-retirement poverty and dependency.

• Economic Stability: Boosts national savings rate and long-term capital.

• Social Equity: Ensures workers from all sectors receive dignified retirement benefits.

• Labour Empowerment: Enhances job satisfaction, loyalty, and inter-generational financial resilience.

• Compliance with SDGs: Especially SDG 1 (No Poverty), SDG 10 (Reduced Inequalities), and SDG 8 (Decent Work).

Challenges in Implementation:

• Affordability for the Poor: Many informal workers cannot commit to monthly contributions.

• Administrative Fragmentation: Multiple schemes under various ministries create confusion and duplication.

• Low Trust in Financial Institutions: Mistrust prevents workers from voluntarily opting into long-term plans.

• Digital Divide: Rural and low-income workers face challenges in accessing online pension services.

Way Forward:

1. Legally Mandate a Basic Pension Floor

   • Constitutionally protect the right to old-age security under Article 41.

2. Merge and Rationalise Schemes

   • Unify EPFO, NPS, APY, and other scattered schemes under a National Pension Authority of India.

3. Shift to Auto-Enrolment with Opt-Out

   • Transform voluntary schemes into auto-enrolment models, as seen in UK.

4. Enhance Accountability via Technology

   • Build a mobile-friendly, multilingual pension app with biometric access and grievance features.

5. Encourage Innovation

   • Collaborate with fintech and insure-tech startups for micro-pension solutions customised for the informal sector.

India’s demographic window is closing. To avoid a future of widespread elderly distress, pension reform must be prioritised as national policy - not postponed as optional welfare.