India Needs to Design an Inclusive Pension System

The Economic Survey 2025-26 reports that Indian pension assets amount to just 17% of GDP, compared with up to 80% in many advanced economies.

India’s Underdeveloped Pension Landscape

• Low Pension Assets: India’s pension assets amount to only 17% of GDP, significantly lower than up to 80% in many advanced economies (Economic Survey 2025-26).
• Limited Workforce Coverage: Currently, only around 12% of India’s workforce is covered by formal pension schemes. Coverage is disproportionately concentrated in the public and organized private sectors, which benefit from multiple parallel schemes.
• Informal Sector Exclusion: The informal sector, comprising almost 85% of the labor force and generating over half of the country’s GDP, largely relies on voluntary schemes like the National Pension System (NPS) and Atal Pension Yojana (APY), which collectively covered only about 5.3% of the total population in FY24.
• Looming Financial Crisis: This exclusion is a major policy gap and a potential financial crisis, especially as India’s old-age dependency ratio is projected to rise to 30% by 2050.
  • Securing the future against old-age poverty is critical for India to achieve developed economy status by 2047.

Challenges to Pension Coverage Expansion

• Fragmented Frameworks: Although the government has introduced social security for gig workers, funded in part by aggregators, this only addresses a fraction of the informal sector and adds another parallel scheme to an already complex web.
• Lack of Awareness : As a large proportion of the current pension coverage for the informal sector is voluntary, the expansion of the insurance coverage depends on the awareness of the beneficiaries.
• Inadequate Benefits: Many retirees in India receive low pension amounts, with a substantial portion receiving less than Rs 1,500 per month.
• Exclusions: The pension system faces challenges in reaching a large segment of the population, particularly those in the unorganized sector.
• Sustainability Concerns: Falling birth rates and increasing longevity place pressure on the sustainability of pension systems, as fewer young people are available to support a growing number of pensioners.

Pension System in Developed Countries

• Japan: It operates a mandatory flat-rate contributory scheme for all residents between the ages 20 to 59 years, encompassing the self-employed, farmers, public and private employees, and their dependents.
• New Zealand: It offers a universal, flat-rate public pension to residents aged 65 years and over, subject to a 10-year residency requirement and roughly 40% rely on it as their main income during old age.
• Netherlands: Its occupational pension funds provide annual disclosures of accrued pension rights to active participants.
• United Kingdom: It runs an opt-out pension scheme for its employees, which promotes participation by default.

Way Forward

• Digital Accessibility: Learning from Nigeria’s investment in digital pension infrastructure, India needs to prioritize user-friendly digital enrolment platforms to increase the reach of its pension system, especially in informal and rural settings.
• Grassroots Sensitisation: Financial literacy efforts must start at the school and college levels, akin to Australia’s superannuation planning in its curriculum, to build early awareness and encourage participation.
  • Mandated annual disclosures of pension entitlements can also significantly enhance public trust and participation.
• Addressing Adequacy Concerns: The Mercer CFA Institute Global Pension Index 2024 report highlighted India’s low overall score (44%) and a sharp decline in adequacy. This underscores the urgent need for reforms to ensure sufficient resources for a dignified retirement.
• Leveraging Private Funds: China’s struggles to maintain its public pension system without private fund support demonstrate the importance of a robust private pension market. 
  • Countries like the Netherlands, Denmark, and Australia successfully rely on private funds to complement their public systems. 
  • India should explore similar avenues, ensuring robust investment regulations and oversight to monitor fund performance and secure liquidity. 
• Targeted Debt Funds: The US approach of using targeted debt funds to ensure reliable returns can also be a valuable lesson.
• Basic Pension Guarantee: This foundational tier would offer a flat-rate contributory pension for all, irrespective of employment status, ensuring a minimum basic security.
• Occupational Pensions: This tier would cover employer-based schemes, which could be either mandatory or opt-out with auto-enrolment, subject to minimum contribution standards.
• Voluntary Pension Savings: The final tier would encourage voluntary savings through tax incentives, market-linked returns, and flexible products, allowing individuals to supplement their retirement income.

Conclusion

A well-structured, inclusive pension system for all, including informal workers, is essential for basic financial security in retirement and for achieving developed economy status by 2047. Policymakers must act decisively to design such a system.