One Nation, One Pension System 

**Debanshu Mukherjee and Neha Lodha

Effective pension systems are a key financial measure for ageing economies. While India has one of the youngest populations in the world today, the median age of our population is likely to change rapidly in the years to come.  As per the India Aging Report 2023, individuals aged 60 and above will make up about 20% of the population by 2050. Today, they comprise roughly 10% of the population. Suffice it to say, that there is a pressing need to design appropriate social security nets to prepare for this enormous demographic change. With the traditional family structures evolving constantly and nuclear families becoming more common, many elderly individuals already find themselves without adequate financial support in their sunset years. This problem will only intensify with time. A case in point is China’s ageing population and its pension system’s inadequacy to support the elderly, setting the stage for a social and economic crisis. The Indian pension system must respond to the early signs of a similar problem.  The reignited debate on pension in India, in light of the new Unified Pension Scheme (UPS), presents an opportunity to re-evaluate the robustness of our current pension regime.

A Patchwork of Schemes 

The pension framework in India is a combination of several discretely operating schemes applicable to overlapping segments of people, leading to disparate coverage. The formal pension schemes in India collectively cover only about 12% of the workforce; which include the newly introduced UPS, National Pension Scheme (NPS), Old Pension Scheme (OPS) and the Employee Provident Fund Scheme (EPF). Before 2004, all government employees were covered under the OPS, whereas the organised private sector was covered under the EPF. In 2004, the NPS was introduced to address concerns about the financial sustainability of OPS and to provide comprehensive pension coverage for all citizens. Under OPS, the entire burden of retirement benefits for government employees is on the public exchequer. In contrast, NPS introduced a contributory, market-linked model of pensions. Although the NPS initially replaced the OPS almost entirely, concerns over the higher market risks tied to NPS have led several state governments to revert to the old model recently. To address this, UPS is now introduced as an alternative, which combines the contributory model of NPS with the assured benefits of the OPS, however, it also brings back concerns regarding the additional burden on government finances.

In the private sector, introducing NPS provided an alternative to the EPF model, with arguably better returns. However, for the unorganised sector, the only formal scheme available is the individual plan under NPS. Notably, the Economic Survey 2024 highlights the increasing number of workers in the unorganised industries and the gig economy, emphasising the need for individual-focused pension plans for such workers. Low-income households also get additional retirement benefits from government-targeted schemes, such as the Atal Pension Yojana, but the long-term sustainability of such schemes is uncertain.

To sum up, there are three parallel schemes operational for public sector employees: NPS, UPS and OPS. The private organised sector employees have access to two alternatives: NPS and EPF. For the unorganised sector, only the NPS is available. This results in a patchwork of retirement benefits that fails to offer an adequate safety net for many citizens. The introduction of UPS for government employees dilutes the “all citizen” approach under the NPS and causes further fragmentation of the pension regime in India.  It also impacts the equitable distribution of pension resources, especially for the private sector. A more inclusive system that guarantees basic pension coverage for all citizens, regardless of employment status, is essential for addressing the vulnerabilities outlined above.

Global Perspectives

In contrast to India’s fragmented approach, countries with successful retirement planning have holistically implemented basic pension coverage for all citizens, through integrated public, private, and occupational pensions. Given India’s substantial population and concerns about the financial sustainability of a fully government-funded scheme, the Japanese contributory pension system could serve as a reference point for reforms.

Japan’s National Pension Scheme is a unified compulsory programme requiring fixed monthly contributions from all eligible residents, regardless of nationality and occupational status, with exemptions only for those facing financial hardship. It covers formal employees engaged in the public and private sectors, self-employed individuals, farmers, students etc. Adequacy of pension coverage is enhanced by enabling voluntary individual-focused pensions through private pension funds. Similar unification and integration of pension systems is a pivotal step in overhauling the pension framework in India.

Securing Our Future

India stands at a critical juncture, where the current reformatory interventions in the pension sector will define the adequacy of financial security for millions in the decades to come. Policymakers must move swiftly to establish a pension framework that addresses the concerns of the different segments of the population holistically. To lay the foundation of a secure and sustainable future for our ageing population, there is a need to integrate the existing schemes into a harmonised system (with or without private sector participation), under an efficiently run common asset management agency. This will not only serve the cause of old-age financial security but also mitigate adverse consequences for the economy in the long run.

**Debanshu Mukherjee and Neha Lodha, Co-founder and Senior Resident Fellow, respectively, at Vidhi Centre for Legal Policy.

Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.