Why in the News?
India’s pension landscape is facing a critical juncture, as highlighted in the Economic Survey 2025-26.
What is the current state of India’s pension ecosystem?
- Low Pension Assets: Pension assets in India are just 17% of GDP, significantly lower than in developed countries, which range around 80%.
- Uneven Coverage: Only 12% of the workforce is covered by formal schemes, mainly in the public and organised private sectors.
- Informal Sector Gap: Informal workers, including gig workers, are largely left out—only 5.3% of the total population participates in Atal Pension Yojana and NPS (FY24).
- Fragmentation of Schemes: India’s pension system is disjointed, unlike the multi-tiered models in countries like Japan and New Zealand.
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Why is pension coverage for the informal sector vital for India’s development goals?
- Large Workforce Contribution: Over 85% of India’s workforce is in the informal sector, contributing more than half of the GDP. Ensuring their old-age security is crucial for inclusive economic growth. Eg: Street vendors, gig workers, and farm labourers often lack any retirement support despite their significant economic role.
- Rising Old-Age Dependency: By 2050, India’s old-age dependency ratio is expected to reach 30%, increasing the burden on working-age populations. Expanding pension coverage now helps prevent future elderly poverty and reduces pressure on public welfare systems. Eg: Without pension security, aging informal workers may become financially dependent on their families or state welfare.
- Achieving Viksit Bharat by 2047: A universal and inclusive pension system is essential to meet the goal of becoming a developed economy by 2047, ensuring that development is sustainable and equitable. Eg: Countries like New Zealand and Japan offer universal pension models that India can adapt to promote long-term social security.
What are the key challenges in India’s current pension system?
- Fragmented and Unequal Coverage: India’s pension landscape is divided across multiple parallel schemes, mainly benefitting public and organised private sector workers, while the informal sector remains largely excluded. Eg: Schemes like EPFO or NPS cover only ~12% of the workforce; gig workers must voluntarily opt into the Atal Pension Yojana, limiting reach.
- Low Financial Literacy and Awareness: A large section of informal workers lack awareness of available pension options due to limited financial literacyand inadequate grassroots outreach. Eg: Unlike Australia, where superannuation education is part of the school curriculum, India lacks structured sensitisation efforts.
- Lack of Sustainability and Liquidity in Funds: Many Indian pension funds face low adequacy and poor returns, threatening long-term sustainability. Eg: According to the Mercer CFA Global Pension Index 2024, India scored just 44%, with a sharp fall in adequacy compared to global benchmarks like Denmark or Netherlands.
How do global pension models ensure inclusivity and sustainability?
- Universal or Mandatory Coverage: Many countries adopt universal or compulsory schemes to ensure no worker is left out, regardless of employment type. Eg: Japan has a mandatory flat-rate contributory scheme for all residents aged 20–59, including self-employed, farmers, and employees. New Zealand provides a universal pension to all citizens aged 65+, with a 10-year residency condition.
- Automatic Enrolment and Employer Participation: Models promoting auto-enrolment and mandatory employer contributions increase participation, especially among informal or gig workers. Eg: The UK operates an opt-out pension scheme, automatically enrolling workers unless they choose otherwise.
- Transparent Communication and Digital Access: Regular disclosures and easy digital access help build trust and improve awareness of pension entitlements. Eg: Netherlands provides annual pension statements to all contributors. Nigeria has invested in digital pension infrastructure to expand access, especially in rural or informal settings.
What are the steps taken by the government?
- Launch of Atal Pension Yojana (APY): Introduced in 2015, APY is a voluntary pension scheme aimed at workers in the unorganised sector, offering a guaranteed monthly pension between ₹1,000 and ₹5,000 after age 60. Eg: As of FY24, APY covered over 5.3% of India’s population, helping bring informal workers under a pension net.
- Expansion of the National Pension System (NPS): NPS was extended to all citizens on a voluntary basis, including gig workers, self-employed individuals, and informal sector workers, with flexible contributions. Eg: The eNPS portal allows for easy digital enrolment and management, making it accessible to informal workers.
- Social Security Code and Aggregator Contribution: Under the Code on Social Security, 2020, the government mandated platform aggregators (like ride-sharing or delivery apps) to contribute towards the social security of gig and platform workers.
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Which reforms can integrate informal workers into India’s pension framework? (Way forward)
- Harmonise fragmented schemes into a three-tier framework: Tier 1: Mandatory basic pension for all, irrespective of employment type. Tier 2: Employer-linked schemes with auto-enrolment. Tier 3: Voluntary savings with tax benefits and flexible options. Eg: Japan’s mandatory flat-rate pension includes self-employed, farmers, and private/public workers.
- Enhance Financial Literacy and Awareness: Launch targeted awareness campaigns on pension benefits, especially in rural and informal sectors, starting at school and college levels.
Eg: Australia includes superannuation education in school curricula; UK promotes pensions through opt-out schemes to increase enrolment by default.
- Strengthen Digital Pension Infrastructure: Develop user-friendly digital platforms for easy enrolment, contribution tracking, and annual disclosures for informal workers. Eg: Nigeria has invested heavily in digital systems to expand pension access across informal sectors.
Mains PYQ:
[UPSC IAS 2023] Development and welfare schemes for the vulnerable, by its nature, are discriminatory in approach.” Do you agree? Give reasons for your answer.
Linkage: This article explicitly states that “the only protection for the informal sector is voluntary adoption under the National Pension System and Atal Pension Yojana” and that “this only addresses a fraction of the informal sector and adds another parallel scheme to an already complex web”.