Inclusive Pension System for India
Source: Times of India
GS II: Government policies and interventions for development in various sectors and issues arising out of their design and implementation
Overview
- News in Brief
- About the Pension System
- Need for Pension System
- Challenges in the Pension System
Why in the News?
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.
News in Brief
- The Economic Survey 2025-26 highlighted that India’s pension assets are only 17% of GDP, with less than 12% workforce coverage.
- 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.
About the Pension System
- A pension provides financial security after retirement, ensuring income stability when earning capacity declines.
- Old-age dependency ratio projected to reach 30% by 2050, heightening the urgency for pension reforms.
Pension Schemes of India
- National Pension System (NPS): It is a defined contribution pension and is voluntary for subscription by an individual to make contributions to his/her Individual Pension Account during their working life.
- Unified Pension Scheme: It has been introduced as an option under the National Pension System (NPS) for the Central Government employees covered under NPS so that they may receive an assured payout after their retirement.
- NPS Vatsalya: It is a National Pension System (NPS) scheme designed for minor Indian citizens, enabling parents or guardians to contribute towards the child’s retirement savings.
- Atal Pension Yojana (APY): It is a voluntary pension scheme launched by the Government of India for all Citizens of India, especially the poor, the underprivileged and the workers in the unorganised sector.
- Employees’ Provident Fund (EPF): It is a retirement savings scheme in India managed by the Employees’ Provident Fund Organisation (EPFO).
Need for Pension System
- By 2050, India’s old-age dependency will rise to 30%, risking a future old-age poverty crisis.
- 85% of the workforce is informal, generating over 50% of GDP, yet remains largely outside formal pension safety nets.
- Increasing urbanisation and nuclear structuration of society necessitate a strong pension system for the social security of old age people.
- The pension system will help address the increasing cost of geriatric care.
- Inclusive pensions are key to sustainable economic growth, vital for India’s target to be a developed economy by 2047.
Challenges in the Pension System
- 12% of the workforce is covered, and NPS and APY reach only 5.3% of the total population.
- APY is voluntary, and low awareness and financial literacy hinder broader adoption.
- Adequacy Index dropped from 41.9 (2023) to 34.2 (2024) in the Mercer Global Pension Index.
- 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.
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