Pension Reforms in India

WHY IN NEWS ?

• India’s elderly population (60+) is 153 million today, projected to reach 347 million by 2050.
• Over 88% of senior citizens work in the informal sector with no assured pension or social security.
• Renewed focus due to:
  • Expansion and redesign of Atal Pension Yojana and National Pension System,
  • Launch of e-SHRAM portal,
  • Labour Codes reform redefining “wages” for pension calculations.
• LASI Survey (2017–18) and Comprehensive Annual Modular Survey (2022–23) reveal:
  • 42% of people above 55 unaware of NPS.
  • 63% of elderly lack basic internet usage skills.

Relevance :

GS Paper II – Governance & Social Justice

• Welfare schemes for the vulnerable sections (elderly, informal workers)
• Social security architecture: IGNOAPS, NPS, APY, e-SHRAM
• Role of Labour Codes in redefining wage-linked social protection
• Digital exclusion and governance delivery gaps
• Institutional mechanisms for old-age welfare

GS Paper I – Indian Society

• Demographic transition and population ageing
• Informalisation of labour and its social consequences
• Gendered vulnerability in old-age employment

GS Paper III – Indian Economy

• Household savings and capital market deepening
• Pension funds as long-term infrastructure financing source
• Fiscal sustainability of OPS vs contributory pensions

BASICS: WHAT IS A PENSION SYSTEM?

• Pension = Regular post-retirement income for old-age security.
• Two broad types:
  • Social Assistance (Non-contributory) → Government-funded.
  • Contributory Pension → Individual + employer/government contribution.

INDIA’S DEMOGRAPHIC & STRUCTURAL CHALLENGE

• Rapid ageing + Informalisation:
  • Informal sector share among 55+:
    • Women: 75.6%
    • Men: 68%
• Consequence:
  • No employer pensions.
  • No assured retirement income.
  • Continued old-age labour → poverty risk + dignity deficit.

FIRST PHASE: WELFARE-BASED SOCIAL ASSISTANCE

Indira Gandhi National Old Age Pension Scheme (1995)

• Target: BPL elderly (65+)
• Nature: Non-contributory
• Role:
  • First national effort to assure minimum old-age income security.
  • Expanded coverage and benefit levels over time.
• Limitation:
  • Very low pension amount.
  • No linkage to savings or investment behaviour.

Old Pension Scheme (Pre-2004)

• For government employees.
• Defined benefit; fully state-funded.
• Problem:
  • Heavy fiscal burden.
  • Unsustainable with rising life expectancy.

SECOND PHASE: SHIFT TO CONTRIBUTORY PENSIONS

National Pension System (2004)

• Replaced OPS for new recruits.
• Features:
  • Defined contribution.
  • Market-linked returns.
  • Applies to:
    • Government employees.
    • Corporate sector workers.
• Recent reform: NPS 2.0
  • 100% equity option.
  • Multiple Scheme Framework (MSF).
  • Targets young, high-risk investors.

Atal Pension Yojana (2015–16)

• For informal sector workers (18–40 years).
• Features:
  • Monthly/quarterly/half-yearly contribution.
  • Government guarantees minimum pension.
• Behavioural impact:
  • Encourages formal savings culture.
  • Improves retirement planning in low-income groups.

THIRD PHASE: BRIDGING FORMAL–INFORMAL DIVIDE

e-SHRAM portal

• National database of informal workers.
• Functions:
  • Registration for welfare schemes.
  • Eligibility discovery.
  • Attempted integration into formal social security.

Challenges:

• Aadhaar–bank–mobile linkage errors.
• Digital exclusion:
  • 63% elderly cannot use the internet.
• Risk of exclusion errors > inclusion gains.

ROLE OF LABOUR CODES IN PENSION SECURITISATION

• Uniform definition of wages:
  • Basic pay ≥ 50% of total earnings.
• Direct impact:
  • Higher:
    • PF contribution,
    • Gratuity,
    • Pension base.
• Closes employer strategy of inflating allowances to reduce social security burden.

POLICY EVOLUTION: SEQUENTIAL LOGIC

• Stage 1 – Welfare Protection:
  • IGNOAPS, OPS.
• Stage 2 – Financial Behaviour Change:
  • NPS, NPS 2.0.
• Stage 3 – Informal Inclusion:
  • APY, e-SHRAM.
• Current Direction:
  • Data-driven targeting + contributory security.

CRITICAL GAPS

• Awareness deficit:
  • 42% above 55 unaware of NPS.
• Coverage vs Access mismatch:
  • Availability ≠ Effective utilisation.
• Digital divide:
  • Elderly excluded from portal-based access.
• Pension adequacy:
  • APY pension slabs insufficient for inflation-adjusted living.

IMPACT ON FINANCIAL SYSTEM

• Promotes:
  • Long-term household savings.
  • Capital market deepening.
  • Reduced old-age dependency ratio pressure over time.
• Shifts India:
  • From welfare-centric pension state
  • To participatory, market-linked social security state.

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