India’s retirement income system has once again been placed at the bottom of global rankings. In the Mercer CFA Institute Global Pension Index 2025, which evaluated 52 countries covering about 65% of the world’s population, India received a D grade with an overall score of 43.8 out of 100. This score represents a slight decline from 44 in the previous year and positions India among the weakest performers, alongside countries like Türkiye, the Philippines, and Argentina.
The index measures pension systems across three main pillars: Adequacy (40% weight), which assesses how well benefits meet retirees’ needs; Sustainability (35%), which evaluates long-term financial viability; and Integrity (25%), which looks at governance, regulation, and public confidence. India scored particularly poorly on adequacy (Grade E, around 34.7), with moderate marks on sustainability (D) and integrity (C). In contrast, the global average stood near 64.5, while top-ranked nations like the Netherlands (85.4, Grade A), Iceland (84.0), Denmark (82.3), and Singapore (80.8) demonstrated strong, well-rounded systems.
Key Structural Challenges
India’s low ranking is not due to a complete lack of pension frameworks but stems from deep-rooted issues tied to its economic structure and policy design. The country operates several major schemes:
- Employees’ Provident Fund Organisation (EPFO) — mandatory for many formal-sector workers, including the Employees’ Pension Scheme (EPS).
- National Pension System (NPS) — a voluntary, defined-contribution, market-linked scheme open to all citizens.
- Atal Pension Yojana (APY) — a government-subsidized scheme aimed at low-income and unorganized workers.
Despite these initiatives, the system struggles on multiple fronts.
1. Extremely Limited Coverage
More than 85% of India’s workforce remains in the informal sector — including agriculture, gig work, small businesses, and daily-wage labour — where incomes are irregular and employer contributions are absent. Formal pension schemes collectively cover less than 25% of the workforce. Many participants in schemes like APY contribute small amounts inconsistently, resulting in meagre retirement benefits. Pension assets as a percentage of GDP remain low (around 15-20%) compared to over 80% in many developed economies.
2. Inadequate Benefits
The biggest weakness lies in adequacy. Replacement rates — the pension as a percentage of pre-retirement income — are often too low to support a dignified life in old age. Schemes like APY promise modest fixed pensions (typically ₹1,000 to ₹5,000 per month), but these are eroded by inflation and low contribution levels. Frequent early withdrawals from EPF accounts for purposes such as housing, education, or medical emergencies further deplete retirement savings. As a result, most retirees, especially from the informal sector, rely heavily on family support or continue working beyond retirement age.
3. Sustainability Concerns
India is experiencing rapid population ageing, which is increasing the old-age dependency ratio. While the shift from defined-benefit to defined-contribution models (via NPS) has helped contain future fiscal liabilities for the government, the overall contributor base grows slowly due to high informality. Public-sector pension obligations under older systems continue to strain state and central budgets. Longer life expectancies add further pressure on the system’s ability to deliver promised benefits over decades.
4. Governance and Trust Issues
Fragmented regulation across schemes, uneven implementation (especially of NPS across states), limited investment choices in some products, and low financial literacy reduce participation and confidence. High rates of premature withdrawals and administrative inefficiencies also undermine the integrity of the system. Many workers view pensions as inaccessible or unreliable, preferring immediate liquidity over long-term saving.
These challenges reflect broader realities: a predominantly informal economy, competing fiscal demands (such as subsidies and infrastructure), and relatively low savings rates among lower-income households.
Signs of Progress and Persistent Gaps
India is not starting from scratch. The NPS has seen significant expansion in recent years, digital platforms have improved accessibility and portability, and schemes like APY have attempted to bring in unorganized workers. The Economic Survey 2025-26 has acknowledged growth in formal pension participation while highlighting the same core issues of coverage and adequacy amid persistent informality.
However, compared to many peer developing economies, India’s performance lags due to the sheer scale of its informal workforce.
What Needs to Be Done
Experts and the Mercer report itself recommend several reforms to strengthen the system:
- Expanding coverage through mandatory or auto-enrolment mechanisms that reach informal workers.
- Introducing a credible minimum income floor or universal basic pension for the elderly poor to address adequacy gaps.
- Enhancing contribution incentives, improving portability between jobs, and discouraging premature withdrawals through better design.
- Boosting financial literacy campaigns and simplifying scheme rules to build trust and participation.
- Gradually increasing pension assets relative to GDP by offering more flexible investment options and attractive tax benefits.
Implementing these changes involves difficult trade-offs. Greater public spending could widen fiscal deficits, while relying solely on individual contributions risks burdening low-income earners. Successful international models often combine mandatory participation, shared employer-employee-government contributions, and strong regulatory oversight — elements that must be adapted to India’s unique demographic and economic context.
As India’s demographic dividend begins to fade and the proportion of elderly citizens rises, the urgency to fix these gaps grows. A stronger pension system would not only improve retiree security but also support higher savings rates, financial market development, and overall economic stability.
Meaningful progress will require sustained policy focus, cross-state coordination, and integration with broader efforts to formalize the economy. Without urgent attention to coverage and adequacy, India’s pension system risks leaving millions of senior citizens vulnerable in the coming decades.
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