JUNE DAY 12 - UPSC DAW - Daily Answer Writing - 18th June 2025

JUNE DAY 12 - UPSC DAW - Daily Answer Writing - 18th June 2025

Question

India’s pension system remains fragmented and inadequate in ensuring old-age security for a majority of its informal workforce. In this context, discuss the challenges in designing an inclusive pension system and suggest a viable framework to make it more equitable and sustainable. (10 marks, 150 words)  [GS - II Social Justice]

Model Answer

Paper  

GS II 

Subject 

Social Justice 

Topic 

Inclusive Pension System 

Syllabus As Per Notification 

Welfare schemes for vulnerable sections of the population by the centre and States and the Performance of these schemes; 

 Introduction:  

  • India is undergoing a demographic transition, with projections indicating that by 2050, nearly 30% of the population will be elderly (UN World Population Prospects, 2022). Simultaneously, over 85% of the workforce remains in the informal sector, with only 12% covered under formal pension systems (Economic Survey 2025–26). An inclusive and sustainable pension framework is thus essential to avert a looming old-age poverty crisis and align with India’s welfare vision under Sabka Saath, Sabka Vikas. 

 Challenges in Designing an Inclusive Pension System: 

  • Fragmentation and Limited Coverage: 

  • India has multiple parallel schemes, EPFO, NPS, Atal Pension Yojana (APY), creating administrative and operational overlaps. 

  • Informal workers lack mandatory pension provisions; APY and NPS are voluntary, leading to poor enrolment (only 5.3% of population in FY24 under APY/NPS - PFRDA Annual Report 2024). 

  • Scalability and Sustainability Constraints: 

  • Pension assets are just 17% of GDP, vs. over 80% in advanced economies (OECD, 2024), limiting long-term fund viability. 

  • Mercer CFA Institute Global Pension Index 2024 ranks India poorly (overall score: 44%), particularly on adequacy. 

  • Lack of Financial Literacy and Sensitisation: 

  • Financial awareness remains low, especially in rural and semi-urban India. 

  • Australia integrates retirement planning in school curricula; India lacks such forward-looking literacy models. 

  • Gig and Platform Workers’ Exclusion: 

  • Code on Social Security 2020 provides for gig workers, but implementation is patchy and aggregator-dependent, mirroring policy uncertainty. 

  • Digital and Procedural Barriers: 

  • Many informal workers lack access to digital banking or pension portals. 

  • Gender digital divide further limits women’s participation in voluntary schemes. 

 

Viable Framework for a More Equitable and Sustainable Pension System: 

  • Tiered and Harmonised Pension Structure: A three-tier model, recommended by NITI Aayog (Vision 2047) and seen in models like Japan and New Zealand: 

  • Tier I – Mandatory Basic Pension: Flat-rate contributory pension for all citizens (like Japan’s National Pension system). 

  • Tier II – Occupational Pensions: Auto-enrolment employer schemes with opt-out options (UK’s NEST model). 

  • Tier III – Voluntary Savings: Incentivised with tax benefits and market-linked options (like US 401(k) system). 

  • Unified Pension Regulator and Digital Infrastructure: 

  • Merge fragmented schemes under a Single Window Pension Authority. 

  • Expand DigiLocker-based e-KYC and mobile onboarding for rural access. 

  • Targeted Financial Literacy Campaigns: 

  • Integrate retirement literacy in school and college curricula, on the lines of Australia. 

  • Use local governance structures (gram sabhas, SHGs) for awareness drives. 

  • Innovative Funding and Investment Reforms: 

  • Encourage Public–Private Partnerships in pension funds (e.g., Netherlands' hybrid pension model). 

  • Allow pension fund investment in sovereign green bonds, REITs, infra debt for better returns and liquidity. 

  • Data-Driven Inclusion and Portability: 

  • Create a Universal Pension Account Number (UPAN) to allow portability across jobs and states. 

  • Use Aadhaar-linked analytics to identify and auto-enrol unprotected workers. 

 Conclusion:  

  • As India advances toward becoming a developed economy by 2047, ensuring universal old-age income security is not just a moral imperative but also an economic necessity to sustain consumption and growth. A unified, equitable, and sustainable pension system, backed by technology, financial literacy, and policy coherence, can transform retirement security for millions, fulfilling the constitutional vision of a just and inclusive welfare state.  

 Value Addition:  

  • SC Observation (Swaraj Abhiyan v. Union of India, 2016): Right to social security is implicit in Article 21 (Right to Life). 

  • ILO Social Protection Floors Recommendation (No. 202): Universal basic income security must include old-age pensions. 

  • Nigeria’s Micro Pension Scheme: Uses mobile tech and incentives to attract informal sector workers. 

  • Budget 2025–26: Allocation to Atal Pension Yojana increased by 12%, yet remains insufficient to scale nationwide coverage.