Old-age security as a Viksit Bharat aim: Begin pension contributions at birth to secure everyone’s post-retirement life

The United Nations Population Fund’s India Ageing Report 2023 projects that the number of persons aged 60 years and above would double from 149 million in 2023 to over 347 million (25% of the population) by 2050. The dependency ratio would grow from 16% in 2020 to 34% by 2050.

This has profound social, political and economic implications. The burden on the younger population and the state to support the elderly will increase exponentially. In this setting, pensions emerge as a critical instrument of social protection, ensuring dignity, independence and financial security in old age.

Policy steps over the past two decades have covered significant ground by replacing unfunded defined-benefit pension schemes for government employees with defined-contribution systems; and by setting up the National Pension System (NPS) for citizens at large.

However, progress on the latter has been modest, given the size of the population to be covered, low financial literacy and failures to appreciate the importance of pension. Yet, concerns of fiscal sustainability, coverage gaps and benefit adequacy in the context of OASIS cannot be overlooked.

The magnitude of the issue calls for a policy shift that recognizes OASIS as a bedrock of socioeconomic stability and harbinger of economic growth. Its approach should define the imperatives and uniqueness of pension as integral to OASIS and focus on pension planning right from birth rather than near or after retirement.

The recently introduced NPS-Vatsalya for children holds promise. It can be an effective OASIS instrument for Viksit Bharat, the philosophical underpinning of which must be universal economic security and stability. NPS-Vatsalya enrols a child below 18 years with a minimum annual contribution of ₹1,000.

We recommend that every child be given a Permanent Retirement Account Number (PRAN) at birth and a PRAN-DAN card (DAN for Defending a Newborn) loaded with an initial contribution of ₹1,000 by the Union government.

Given that 23-25 million children are born each year, the outlay would be ₹2,300 crore, a modest sum compared to expenditure on the Indira Gandhi National Old Age Pension Scheme alone, which provides a monthly pension of ₹200-500 for the poor aged above 60 years.

The PRAN should be linked to the mobile/UPI number of the newborn’s guardian, who should be prompted through a message every month to contribute a minimum ₹100 to the account.

The initial contribution of ₹1,000 could be funded in several ways: court penalties and fines, traffic challans, unclaimed funds with banks, insurance companies, etc; or even donations from individuals or companies, including NPS intermediaries, potentially through co-branded and QR-code embedded PRAN-DAN cards.

For the scheme to take off, contributions to Vatsalya must be tax exempt, as under the old income tax regime. For parents under the taxability threshold, the government could consider supplementing the parents’ contribution if fiscally feasible.

State governments can be encouraged to supplement contributions too, considering how it will reduce their future social security burden.

Children signed up for the scheme in 2026 will be at least 21 years old in 2047. By then, their PRAN account will have a sufficient accumulated corpus to provide a sense of financial stability. Their starting stake should motivate them to keep making contributions after getting employment.

The corpus will grow further with monthly contributions during their working lives, imbuing them with confidence predicated on the promise of a respectable monthly pension after retirement.

Our calculations show that with annual contributions of ₹1,200 up to 25 years of age, ₹1.2 lakh from 26-30, ₹1.8 lakh from 31-40, ₹2.4 lakh from 41-50 and ₹3 lakh from 51-60, the corpus will grow to over ₹4.2 crore by age 60 if compounded at 9%, which is around the current rate of return on NPS funds.

This can provide a pension of over ₹2.1 lakh a month (at 6%), with the corpus intact. By 2047, when most of India’s elderly population receiving unfunded pensions from the government will have passed on or reduced substantially, the nation will be in an enviable position with largely funded OASIS.

All it takes is an annual government investment of ₹1,000 per child to encourage higher amounts being put in by subscribers. The entire amount being locked in for up to 60 years would help India fund long-gestation projects.

The massive pool of pension funds (the NPS has over ₹15 trillion despite limited participation) so built over the decades will support economic growth.

Empirical evidence from various countries shows that elderly poverty rates are much lower where pension coverage is broad and its benefits adequate. As someone said, you cannot cross a chasm in two leaps; the time to take a policy leap across the country’s pension chasm is now.

The authors are, respectively, former chairman of the Securities and Exchange Board of India and former executive director of the Pension Fund Regulatory and Development Authority