There is a need for a universal pension system for decent retirement in India

A universal pension system can close the coverage gap and provide financial security to millions of older people.

A Universal Pension System for India:As people age, they generally become less financially productive and cannot earn enough to support themselves. India’s share of senior citizens, those aged over 60, is estimated to reach 11% (15.9 crore) in 2024 and is expected to reach 20% (34.8 crore) in 2050. Currently, only 27-30% of senior citizens receive financial support through pensions. This includes Union pensioners, state and local governments, the Employees’ Pension Scheme, the Indira Gandhi National Old Age Pension Scheme (IGNOAPS) and other private corporate pensions. India is thus characterised by low pension coverage for senior citizens, with IGNOAPS being the only government-funded social pension covering 18.5% of senior citizens.

Since 1995, the Union Ministry of Rural Development, in accordance with Article 41 of the Indian Constitution and as per the guidelines of the State Policy, introduced pension benefits for the needy, starting from Rs 75 for those aged 65 years and above. In 2007, the IGNOAPS amount was revised to Rs 200 for all below poverty line (BPL) citizens. In 2011, the pension eligibility age was lowered to 60. Additionally, BPL senior citizens aged 80 years and above were entitled to Rs 500. Currently, a fixed universal pension, which is income, residence and age tested, is available to all Indians.

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Towards a universal pension system

Since 2009, government pension schemes such as the National Pension System (1 May 2009) and Atal Pension Yojana (9 May 2015) have been available. Tailor-made pension schemes targeting economically disadvantaged groups, such as the National Pension Scheme Lite (1 April 2010) and Pradhan Mantri Shram Yogi Maandhan Yojana (1 February 2019), have also been introduced. However, these schemes require systematic long-term contributions, which poses a challenge to their sustainability as people are often myopic about future savings.

Pensions, in addition to smoothing consumption and limiting longevity risks, also reduce income inequality and poverty through intra- and intergenerational transfers of resources. To promote the well-being of older people, a universal pension system, assessed only on age and place of residence, is therefore recommended. This approach offers higher coverage and reduces administrative costs.

International experience shows that more than 80 developing countries have introduced social security pensions. Among them, several countries offer pensions to the elderly without any other test than residence and age, including Bolivia, Botswana, Brunei, Canada, Chile, Guyana, Kosovo, Lesotho, Mexico, Mauritius, Nepal, Namibia, New Zealand, Samoa, Suriname and Zanzibar.

The financial burden of providing a universal pension scheme is not large. For example, a monthly pension of Rs. 1,000 to 15.9 crore senior citizens would amount to Rs. 1.9 lakh crore in 2024-25, or nearly 0.6 percent of GDP. Most countries finance their universal social pension schemes (USPS) through general taxation. Several developing countries, due to the informal nature of their economies, finance pensions through consumption taxes, corporate taxes, special taxes on luxury goods and “bad goods”, and CSR funds. Lesotho and Swaziland finance their universal social pension schemes through general taxation, while Costa Rica uses a mix of payroll taxes, sales taxes and cigarette taxes.

In India, USPS can be funded by a marginal increase in taxes on income and profits (by increasing the cess), certain luxury goods and services, “bads” (alcohol and cigarettes) and profits from trade. Implementing a universal pension scheme for the elderly would increase pension coverage by 70 percent (104 million). The Periodic Labour Force Survey (2019-20) shows that 90 percent of wage earners earn less than Rs. 25,000, implying that workers have little to save for the future. USPS would not only be a savior for the elderly but also for future generations, by maintaining social equity and welfare.

The elderly are more likely to use pension funds for the welfare of the family than the younger generation. The elderly are generally considered more responsible and can supplement the family’s resources in a more meaningful way. This would also reward the elderly who served the country in their youth, allowing them to retire with some degree of personal comfort, without worries and with dignity.