India’s pension gap is growing

The Union Cabinet’s decision to extend the Atal Pension Yojana till 2030–31 has been widely welcomed as a reaffirmation of the government’s commitment to old-age income security for low-income and unorganised workers. In a country where formal retirement savings remain the exception rather than the rule, APY has emerged as a rare social security intervention that is simple in design, broad in reach and politically sustainable.

That success, however, should not obscure a deeper and less discussed reality. India’s pension challenge is no longer confined to the poorest workers. It is steadily widening across the middle-income workforce, particularly among those who are not government employees and whose working lives are increasingly shaped by contractual, fixed-term and non-standard employment arrangements.

India is often described as a young country, but this headline conceals a significant demographic transition. The population aged 60 and above is rising steadily and is projected to account for a much larger share of the population by mid-century. Longer life expectancy, declining fertility and weakening family support systems mean that older Indians will spend more years dependent on personal savings rather than intergenerational transfers. Yet preparedness for retirement remains strikingly low. As recently as 2019, only about 14.5 percent of households reported having any form of formal retirement savings, a modest improvement over earlier years but far from adequate for an ageing society.

APY was introduced to address one end of this problem, the near absence of retirement income among unorganised workers. Its design is deliberately modest. Subscribers contribute small amounts during their working years in return for an assured monthly pension ranging from Rs 1,000 to Rs 5,000 after the age of 60. The appeal of the scheme lies not in financial sophistication but in trust, automation and the guarantee of a predictable outcome.

Evidence suggests that APY has delivered benefits beyond its immediate objective. Participation does not appear to displace other savings. Instead, households enrolled in APY are slightly more likely to engage with additional formal financial instruments such as provident funds, insurance products and annuities. Enrolment is also higher among marginalised communities, rural households and women, groups that have traditionally remained outside formal retirement planning. In this sense, APY functions both as a basic pension and as a gateway into the wider financial system.

But the very features that make APY effective at the bottom of the income distribution also underline why it cannot carry the weight of India’s broader pension challenge. APY is a floor, not a ladder.

India’s pension architecture remains segmented rather than layered. Government employees continue to enjoy assured or defined benefit pensions. A section of organised private sector workers has access to provident funds, employee pension schemes and the National Pension System. At the other end, social pensions and APY provide minimum income support for the poorest. Between these poles lies a large and growing workforce that does not fit neatly into any category.

This group includes contractual and fixed-term employees, self-employed professionals, small business owners, gig and platform workers and private sector employees in firms that fall outside effective compliance. They are not poor enough to rely on social pensions, but they lack the employment stability required to accumulate adequate retirement savings through existing contributory schemes.

While official data does not show a simple decline in organised private sector employment, it does point to a labour market where continuity and tenure can no longer be assumed. Formal employment increasingly coexists with short contracts, frequent job changes and third-party hiring. Formality, in other words, does not guarantee stability.

This matters because India’s main contributory pension instruments were designed for long, uninterrupted careers. Provident fund coverage often becomes fragile under fragmented employment. Contributions stop and start, accounts are withdrawn prematurely and savings leak out of the system. Employee pension benefits, which depend heavily on tenure, are particularly vulnerable to short-term and discontinuous work. Many workers who spend decades in formal employment in aggregate will still retire with modest and unreliable pensions.

The National Pension System was expected to address this gap, especially for those outside government service. Yet its reach among middle-income, self-employed and contractual workers remains limited. Participation is voluntary, returns are market-linked and annuity products remain poorly understood. Employer co-contributions are rare outside stable corporate employment, reducing the system’s ability to deliver adequate replacement income.

The result is an emerging pension risk that sits squarely in the middle of India’s income distribution. This group earns too much to qualify for subsidies and minimum pensions, but too little, or too irregularly, to self-insure against longer retirements. Many continue to rely on housing, gold and family support as implicit retirement strategies, assets that are illiquid, unevenly distributed and increasingly unreliable in the face of longer life expectancy.

Seen in this context, the experience of APY offers an important lesson. It demonstrates that households will save for old age when products are simple, automated and backed by institutional trust. The policy failure lies not in APY’s limited ambition, but in the absence of comparable design thinking for the middle-income workforce whose employment conditions no longer align with traditional pension models.

What is needed is a shift from scheme-based thinking to system design. The first priority must be continuity. Pension accounts should follow workers seamlessly across jobs, sectors and employment statuses, without exit penalties or forced withdrawals. Portability needs to be meaningful in practice, not merely a regulatory provision.

Second, the rise of contractual and non-standard work requires a rethink of employer responsibility. Even where workers are hired through intermediaries, principal employers benefit from their labour. A framework of mandatory micro-contributions, shared between workers and principal employers and linked to wage payments, would better reflect today’s labour market realities.

Third, default enrolment must become central to pension policy. Evidence from across countries shows that opt-out systems dramatically increase participation. For workers facing income volatility and uncertainty, reducing administrative and behavioural barriers is essential.

Finally, pension adequacy must be treated as an explicit policy goal. Preventing old-age poverty is necessary, but insufficient. For middle-income households, pensions must aim for reasonable income replacement over longer retirements, with some protection against inflation and longevity risk.

The extension of APY should therefore be welcomed, but also read as a warning. India has learnt how to build a pension floor for the poorest. It has yet to construct a coherent pension ladder for a workforce increasingly defined by unstable work. If pensions continue to be treated as peripheral welfare schemes rather than core economic infrastructure, today’s demographic transition risks becoming tomorrow’s social and fiscal strain.

The writer is a policy analyst focusing on employment, demographics, and economic development. He writes on the intersections of workforce trends, technology, and industrial policy