The global pension landscape is under stress as people live longer and retire earlier. Each major economy faces distinct challenges—Europe must invest more, the United States must save more, and China must consume more. India, however, needs to do all three. The recent reforms introduced by the Employees’ Provident Fund Organisation (EPFO) mark a significant shift from a control-driven to a trust-based system, laying the groundwork for further reforms in portability, choice, and competition. These shifts have far-reaching implications for India’s fiscal health, formal job creation, and domestic capital formation.
The Three-Pillar Pension Model
Modern pension systems rest on three pillars: the state, the employer, and the individual. The first pillar was pioneered by Germany’s Otto von Bismarck, who introduced pensions at an age well beyond the average life expectancy of his time. Today, that equation has reversed—many European pensions start at nearly half of life expectancy, creating unsustainable fiscal burdens arising from unfunded government pension promises.
Unfunded pension promises—essentially future tax or inflation commitments—pose serious risks. With India’s public debt nearing 80% of GDP, it is critical that EPFO evolves for the realities of a modern labour market. Jobs today are no longer lifetime contracts but flexible, short-term arrangements. This calls for a system with seamless pension portability and fair contribution levels that do not discourage formal employment. In addition, it must change to implement healthy competition that will further drive efficiency and user satisfaction.
Key Features of the Recent EPFO Reforms
The EPFO’s recent overhaul simplifies and modernises its framework in five major ways:
- Simplified Withdrawals: Thirteen withdrawal categories have been streamlined into three: Essential Needs (education, marriage, and medical emergencies), Housing (purchase or construction), and Special Circumstances (retirement, disability, retrenchment, voluntary retirement, or relocation abroad).
- Revised Limits: Withdrawal limits have been rationalised, capping partial withdrawals at 75% of savings while permitting full withdrawal only for retirement, disability, or permanent relocation.
- Behavioral Safeguards: Drawing on behavioral economics, the reforms discourage impulsive withdrawals by increasing the waiting period for withdrawals after job exit, from 2 to 12 months for defined contributions and from 2 to 36 months for defined benefits.
- Sustainability Measures: Members must now maintain a minimum 25% balance, ensuring long-term compounding and retirement security.
- Digital Integration: The creation of a digital public infrastructure includes auto-settlement of claims up to ₹5 lakh, a unified digital passbook, and online life certificates for pensioners.
These long-awaited measures enhance transparency, efficiency, and member satisfaction while expanding coverage.
Towards a Lifetime Social Security Account
The bigger vision behind these reforms is to transform EPFO from a narrow retirement savings tool into a Citizen Social Security Account (CSSA) linked to Aadhaar. This account could integrate contributions from the government, employers, and individuals—serving the needs of formal, informal, gig, and agricultural workers alike. Achieving this goal requires further reforms in competition, choice, and portability.
1. Competition
EPFO currently operates as a monopoly, charging employers almost 4% of contributions—ten times higher than comparable funds such as those of the State Bank of India. Globally, pension funds absorb these costs themselves. This inefficiency stems from what economist William Baumol termed the “cost disease” of monopolies. Introducing competition, as was done in telecom and banking reforms, would help India’s pension system lower costs and improve service quality. Employees should have the freedom to choose between EPFO and the National Pension System (NPS), with annual flexibility to switch.
2. Choice
Employees should have greater autonomy over their earnings and savings. The current system of retirement savings in India imposes a disproportionate deduction burden—higher on low-wage earners than on higher-income employees. Workers should be allowed to decide whether to contribute the standard 12% and whether to remain in the defined benefit scheme or direct contributions to their personal accounts.
3. Portability
In today’s gig-driven economy, workers often change employers—or become self-employed—multiple times. Yet EPFO’s employer-linked accounts result in millions of orphaned balances due to limited pension portability. Linking accounts directly to the employee’s Aadhaar number would make savings fully portable, traceable, and accessible, extending coverage even to self-employed and informal sector workers.
Building the Future of Social Security
When India’s Constitution made social security a Directive Principle rather than a Fundamental Right, leaders like Jawaharlal Nehru acknowledged the nation’s limited resources, arguing that true welfare requires economic growth first. That pragmatism remains valid.
EPFO’s ongoing reforms are a promising step toward a more inclusive, efficient, and individual-centric pension framework. By embracing competition, choice, and portability, India can transition toward a universal social security system—one that reflects not just longevity, but financial dignity for every worker.
This article is based on a recent OpEd by Manish Sabharwal, TeamLease Services Ltd., in the Indian Express dated October 24, 2025: EPFO changes will enhance social security.
