India needs to design an inclusive pension system
Pensions are essential for maintaining economic stability and dignity after retirement. Retirees often face financial instability due to reduced earning capacity, rising health-care costs, and inflation, necessitating a safety net in the form of pensions.
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. Currently, only around 12% of India's workforce is covered by formal pension schemes. The coverage is also disproportionate, with public sector and organised private sector workers being protected under multiple parallel schemes. In contrast, the only protection for the informal sector is voluntary adoption under the National Pension System and Atal Pension Yojana. These two schemes accounted for about 5.3 % of the total population in FY24.
Integrate the informal sector
Notably, almost 85% of the informal labour force is generating more than half of the country's GDP. As markets evolve, the gig economy will only expand further. Their exclusion from the pension framework is not only a policy gap but also a looming financial crisis in the making. By 2050, India's old-age dependency ratio will increase to 30%. Consequently, India's path to achieve developed economy status by 2047 will depend, in no small measure, on our efforts to secure the future against old-age poverty.
Currently, the expansion of pension coverage is hindered by issues that are linked to scalability, sensitisation, and sustainability.
The primary reason for the exclusion of informal workers from the pension framework is the fragmented nature of pension schemes. 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. On the contrary, most mature economies have a well-structured pension ecosystem with multiple tiers that cater to the diverse needs of the entire population. For example, Japan 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. Similarly, New Zealand offers a universal, flat-rate public pension to residents aged 65 years and over, subject to a 10-year residency requirement; roughly 40% rely on it as their main income during old age.
As a large proportion of the current pension coverage for the informal sector is voluntary, the next roadblock in expansion is a lack of awareness. As financial literacy in India remains low, efforts at sensitisation need to start at the grass-root level. For example, the financial literacy policy in Australia enables the school curriculum to incorporate a component on superannuation planning.
In the Netherlands, occupational pension funds provide annual disclosures of accrued pension rights to active participants. The United Kingdom runs an opt-out pension scheme for its employees, which promotes participation by default. Sensitisation is also linked with increasing accessibility of pension products, such as in Nigeria, which has invested heavily in a digital pension infrastructure to increase the reach of its pension system.
Ensuring sustainability and liquidity
Finally, sustaining the financial health and liquidity of pension funds are critical to securing sufficient resources for a dignified retirement. The Mercer CFA Institute Global Pension Index 2024 Report assigned an overall value of 44% to the Indian pension system, with a sharp decline in the adequacy ratio.
Notably, China, which performed on the index, is currently facing challenges in maintaining its public pension system without support from private pension funds. Thus, support from private funds is important in developing a robust market. The Netherlands, Denmark and Australia also rely on private funds to support the public pension systems. In the United States, pension fund investments are secured through targeted debt funds to ensure reliable returns.
A three-tiered framework
To address the problems of scalability, sensitisation and sustainability, at the outset, India should harmonise fragmented schemes into a tiered system overseen by a unified regulator. In an ideal design, the first tier would comprise a mandatory basic pension guarantee, offering a flat-rate contributory pension for all, irrespective of employment status. The next tier would cover occupational pensions that may be mandatory, or on an opt-out basis, establishing employer-based schemes with auto-enrolment, subject to minimum contribution standards. The final tier would include voluntary pension savings, incentivised through tax benefits, market-linked returns, and flexible products to supplement retirement income.
In addition, measures such as targeted financial literacy campaigns at the school and college levels, user-friendly digital enrolment platforms, and mandated annual disclosures of pension entitlements can significantly enhance public participation and trust in the system. Further, robust investment regulations and oversight are necessary to monitor pension fund performance and ensure sufficient liquidity to meet long-term pension obligations.
As India undergoes a demographic shift, a minimum pension guarantee and a well-structured pension system for everyone, including informal workers, will ensure basic financial security during retirement. Policymakers must act now to design a truly inclusive pension system for all, regardless of their occupational status.
Neha Lodha is Senior Resident Fellow, Vidhi Centre for Legal Policy. Vallari Dronamraju is Research Fellow, Vidhi Centre for Legal Policy. The views expressed are personal
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