How Atal Pension Yojana is helping Indians save for retirement

Government of India’s contributory pension scheme, Atal Pension Yojana, encourages citizens to save for retirement. This study finds that APY not only provides a basic pension, but also promotes broader financial inclusion by incentivising enrolled households to save more via other formal financial instruments. Marginalised and rural populations are more likely to enrol in APY, with digital financial technologies having the potential to boost participation.

While India has one of the youngest populations in the world, it is simultaneously experiencing a quiet but significant demographic shift: a rapid rise in the elderly population. In 2011, India had over 104 million people aged 60 and above, accounting for more than 8% of the population, and this share is projected to double by 2050 (UNFPA, 2023).

With the elderly population growing rapidly, there is an increasing need to address the economic and social challenges posed by an ageing society. With low per capita income and higher income inequality, India's older adults are among the most vulnerable sections of the population (Srivastava and Mohanty 2012, Sengupta and Rooj 2019). The increase in life expectancy and declining fertility rates have also compounded the burden on existing social security systems. One of the critical challenges for older adults in India is the lack of sufficient retirement savings. This issue has broader implications for their quality of life and economic security as they transition into retirement.

Despite the introduction of various financial instruments aimed at improving quality of life post-retirement , formal retirement savings in India remain alarmingly low. According to the National Sample Survey (NSS), in 2019, only about 14.5% of households reported having formal retirement savings, a slight increase from 10.9% in 2013. The slow growth of this key post-retirement financial support may make it harder to ensure a good quality of life for India’s elderly.

Promoting old-age income security through Atal Pension Yojana
Low-income populations often face resource constraints and require assistance to save and build assets for their retirement years. Social pension schemes can improve household welfare through greater consumption expenditure and improved health (Huang and Zhang 2021). One such scheme is the Atal Pension Yojana (APY), introduced by the Government of India as part of the 2015-16 Union Budget to address the challenges posed by old age and absence of old-age income security among  workers in the unorganised sector. APY encourages citizens to voluntarily save for retirement by contributing a fixed amount during their working years. The Pension Fund Regulatory and Development Authority (PFRDA) manages APY under the National Pension System (NPS). Any Indian citizen aged between 18 and 40 with a bank account is eligible, and APY subscribers are guaranteed a minimum monthly pension of Rs. 1,000, 2,000, 3,000, 4,000, or 5,000 when they reach the age of 60, based on their contributions. Subscribers can contribute at different frequencies: monthly, quarterly, or half-yearly. They can also exit from APY voluntarily, provided they fulfil certain conditions, and receive the amount  accrued up to that point including government co-contribution and interest.

APY provides citizens with old-age income security, especially those from the unorganised sector, who lack access to the same formal retirement savings as organised sector employees. APY can also play a significant role in bringing greater financial inclusion in society and enhance household welfare. It can impact the overall financial savings of households – including whether they participate in other forms of formal retirement savings.

Assessing the impact of the scheme
In a recent study (Rooj and Sengupta 2024),  we examine whether the introduction of APY has impacted the net savings of households, which can have significant implications for future generations of older Indians and the overall health of the economy.  

A major challenge when examining the role of APY in the decision to save for retirement is to address the potential ‘endogeneity’ problem. Endogeneity occurs when unobserved factors, such as an individual's motivation or financial literacy, influence both the decision to enrol in APY and the decision to save for retirement. We address this challenge by employing a modern “copula regression” methodology,1 which enables researchers to control for these unobserved factors and gain a clearer understanding of the causal relationship between APY participation and formal retirement savings (Marra and Radice 2017)2. 

We empirically analyse the role of APY on other forms of retirement savings in India using data from the NSS 77th Round Debt and Investment Survey, conducted from January to December 2019.

Enhancing broader financial inclusion
We show that APY has a ‘crowding-in’ effect – that is, instead of displacing other forms of savings, it encourages households to save more via additional formal financial instruments. These may include private pension plans, provident funds, life insurance, and annuity certificates. Households enrolled in APY are, on average, about 2 percentage points more likely to put money into other formal retirement saving instruments compared to non-enrolled households. Although the magnitude is modest, the effect is statistically significant, suggesting complementarity rather than substitution between APY and other formal savings channels.

A potential reason for the crowding-in effect of APY is that it represents a low-cost, automated savings mechanism, with contributions regularly debited from the subscriber’s bank account. This feature serves as a commitment device, particularly valuable for low-income households that may struggle with financial discipline or have limited access to formal savings instruments.

By formalising a channel for long-term retirement savings, APY can raise awareness about financial planning and contribute to greater financial literacy, which in turn may encourage households to explore and adopt additional formal saving instruments. Moreover, the scheme’s requirement of a linked bank account helps lower transaction costs, facilitating broader engagement with the financial system. Collectively, these mechanisms may activate latent saving preferences among households that were previously excluded from or distrustful of formal finance, thereby leading to a net increase in household retirement savings rather than a substitution of existing savings. This finding is significant because it demonstrates that APY not only provides a basic pension, but also promotes broader financial inclusion by incentivising individuals to participate in various retirement savings options.

Demographic characteristics of the participants
We further show that marginalised groups, especially Scheduled Tribes, have a higher propensity to enrol in APY. These groups are typically engaged in low-paying, informal employment with little job security. For them, APY represents one of the few formal options available for retirement savings. The higher participation rate among marginalised populations suggests that APY is successfully reaching those who are most vulnerable and have the least access to other financial products.

APY plays an especially crucial role in rural areas, where financial infrastructure is less developed. Rural households are more likely to participate in APY than their urban counterparts, indicating that the scheme is helping to narrow the financial inclusion gap between urban and rural populations.

The scheme’s impact is also seen across different social and economic categories. Households with more female members tend to save more, likely because women are more reliant on structured savings schemes like APY to secure their financial futures. Additionally, self-employed individuals, though less likely to participate in formal retirement savings due to income volatility, benefit significantly from APY, as it provides a structured and government-backed safety net for retirement.

Leveraging digital financial technologies
The integration of digital financial technologies is another key factor driving the success of APY. Households that utilise digital payment methods, such as mobile banking and credit/debit cards, are more likely to enroll in APY. This is particularly important as India continues to digitise its economy. The government's push for digital inclusion through initiatives like Digital India has helped bring financial services to millions of previously underserved individuals. The accessibility of APY through digital platforms enables people in remote areas to easily open accounts and contribute to the scheme, thereby further expanding its reach.

By leveraging digital financial tools, APY contributes not only to financial inclusion but also to the overall development of a digital economy. As digital infrastructure improves, more households are expected to enroll in APY, thereby increasing their participation in formal retirement savings.

Additionally, the analysis revealed that  larger households may struggle to save for retirement due to the financial burden of supporting more family members. Meanwhile, higher consumption expenditure is positively correlated with APY enrolment, suggesting that households with more disposable income are more likely to participate in the scheme.

Insights for policy
These findings have important policy implications. First, APY has proven to be a successful tool for promoting financial inclusion, particularly for marginalised and rural populations. As the scheme gains traction, policymakers ought to focus on expanding its outreach, particularly among unorganised workers who still lack access to formal pension plans. For the self-employed, policymakers may consider targeted interventions, perhaps by offering more flexible contribution plans that account for income volatility.  

Second, the positive correlation between digital financial technologies and APY enrolment indicates the potential for leveraging India’s growing digital infrastructure to enhance financial inclusion. Expanding digital access to financial products and services in rural and underserved areas should be a priority for the government. This will not only increase participation in APY but also improve overall financial literacy and security.

The path forward lies in expanding access, enhancing financial literacy, and ensuring that all Indians, particularly those in the unorganised sector, have the necessary tools and resources to plan for a secure and stable retirement.

Authors: Prof. Reshmi Sengupta, Faculty of Economics, FLAME University and Prof. Debasis Rooj, Faculty of Economics, FLAME University.