India needs to design an inclusive pension system, Pg10

Key Highlights:

• Only 12% of India’s workforce is covered by formal pension schemes.
• Pension assets in India amount to just 17% of GDP, compared to up to 80% in developed economies.
• Informal sector, forming 85% of workforce, has limited access to pensions—mainly via voluntary schemes like NPS and Atal Pension Yojana.
• India’s old-age dependency ratio is projected to reach 30% by 2050, intensifying retirement insecurity.
• The fragmented pension structure and lack of financial literacy hinder expansion.
• India’s pension system scored 44% in the Mercer CFA Global Pension Index 2024, with low adequacy ratings.

Detailed Insights:

• Current pension setup is skewed towards public and organised private sector workers; informal and gig workers are largely excluded.
• Countries like Japan and New Zealand have universal or mandatory pension models for broad coverage.
• Australia, Netherlands, and the UK improve participation through financial literacy, digital infrastructure, and opt-out schemes.
• Sustainability issues require a balance of public and private pension funds, as seen in Netherlands, Denmark, and USA.
• China’s ongoing struggle with a purely public pension system underscores the need for multi-tiered models.

Way Forward: 

• Consolidate and simplify the fragmented pension structure for easier access and administration. 
• Enhance financial literacy and digital infrastructure to boost participation in voluntary pension schemes. 
• Incentivize private sector and self-employed participation with targeted tax benefits and flexible contribution options. 
• Strengthen regulatory oversight and data systems for better tracking of pension coverage, adequacy, and fund management. 

Key Concepts Involved:

• Old-Age Dependency Ratio: Ratio of older dependents (aged 65+) to the working-age population.
• Pension Fund Liquidity: The fund's ability to meet obligations through reliable investments and timely payouts.
• Three-Tier Pension Model: Includes basic guaranteed pension, occupational schemes, and voluntary savings—seen in global best practices.
• Auto-Enrolment: Automatic inclusion of employees into pension schemes with opt-out provision.

Mains Mock Question:

India’s current pension system is inadequate and fragmented. Propose a structural and policy framework to ensure universal pension coverage, particularly for informal and gig economy workers.