Defaults Beat Willpower: Behavioural Economics and India's Pension Gap

themoneyclause

4 hours ago

6 min read

Most people know they should save for old age. Most do not save enough, and the reason is rarely ignorance. Retirement is far away, the sums are dull and today's expenses are loud. Behavioural economics starts there and asks a design question: if people will not act, what happens when the default acts for them?

The evidence from the United States is striking. India's version of the problem is bigger, and its main pension scheme for the unorganised sector has a feature that a default alone cannot fix.

Bar chart of what a pension of 5,000 rupees a month would buy today, after 10 years, after 20 years and after 30 years at 4% inflation — Figure 1. A fixed pension of ₹5,000 a month loses purchasing power every year. The 4% inflation rate is an assumption, and ₹5,000 is the top slab of the Atal Pension Yojana.

The chart shows what ₹5,000 a month, the top pension slab under the Atal Pension Yojana (APY), would buy after 10, 20 and 30 years if prices rise 4% a year. We come back to it below. First, the evidence on defaults.

What a default does

In a 2001 study of one large US company, the share of employees contributing to the retirement plan rose from 37% to 86% after the company switched from asking people to join to enrolling them automatically, with an option to opt out, according to the Center for Retirement Research (CRR) at Boston College. The pattern appeared again in three large firms studied by economists James Choi, David Laibson, Brigitte Madrian and Andrew Metrick. Participation among employees with six months' tenure was 26% to 43% before automatic enrolment and 86% to 96% after, according to a Wharton summary of that research.

Study	Setting	Result
2001 company study, via CRR	One large US company	Participation rose from 37% to 86%
Choi, Laibson, Madrian and Metrick (2001)	Three large US firms	Participation of 86% to 96% after, against 26% to 43% before
Same study	Same three firms	About 80% first kept both the default rate and fund, and about half still did after three years
Recent study, via CRR (2025)	US 401(k) plans	The 2.2-point first-year rise in saving rate shrinks to 1.8 after five years, 1.5 after job turnover and 0.6 after cash-outs
UK mandatory enrolment, via CRR	United Kingdom	About 20% of the extra saving was offset by more unsecured debt

The default has a catch. People tend to accept it as it is. In the three-firm study the default savings rate was low, 2% or 3%, and the default fund conservative. People enrolled automatically contributed less and invested more cautiously than those who chose to join. On average the authors found that the gain in participation and the loss from low contributions roughly cancelled, though automatic enrolment did raise saving among people who would otherwise have saved nothing. The recent study summarised by CRR points the same way: the effect is real but smaller than the 37-to-86 headline suggests.

Save More Tomorrow

Richard Thaler and Shlomo Benartzi designed a nudge aimed at the low-default problem. Under Save More Tomorrow, employees commit in advance to put part of future pay rises into retirement saving. People dislike cutting spending they already have, but they accept giving up a share of a raise they have not yet received. In the first company that used it, 78% of the employees offered the plan joined, and 80% of those who joined stayed in through the fourth pay rise. Average saving rates went from 3.5% to 13.6% over 40 months (Thaler and Benartzi, Journal of Political Economy, 2004).

India's pension gap

The Mercer CFA Institute Global Pension Index 2025 gave India a D grade and a score of 43.8 out of 100 among the 52 retirement systems it covers. According to Business Today, adequacy was graded E, and the EPFO, the National Pension System and the APY together cover less than 25% of the workforce. Business Today also reports that nearly 85% to 90% of India's informal-sector workforce lacks access to formal retirement benefits.

The APY, launched in 2015, is the government's attempt to reach the unorganised sector. It is open to people aged 18 to 40 and pays a guaranteed pension of ₹1,000 to ₹5,000 a month from age 60, with contributions debited automatically from the subscriber's bank account. By April 2026 it had more than 9 crore (90 million) enrolments, and a record 1.35 crore (13.5 million) people joined in 2025-26, according to Angel One. Women made up about 55% of new enrolments in 2024-25 and 48% of all enrolments by October 2025, according to Impri India. Income-tax payers have been barred from joining since 1 October 2022.

That is a large enrolment achievement, and it is a nudge in action: the bank account is the default channel and the contribution leaves it without anyone having to decide each month.

The fixed pension problem

The ₹5,000 top slab has not changed since the scheme launched, according to Impri India. The amount is fixed in rupees, so what it buys depends on inflation over the 20 to 42 years between joining and retirement. The government has chosen not to raise the slabs, partly because higher pensions need higher contributions, which could deter low-income workers. That is a fair trade-off. It also means the promise shrinks as the years pass.

Monthly pension	After 10 years	After 20 years	After 30 years
₹1,000	₹676	₹456	₹308
₹3,000	₹2,027	₹1,369	₹925
₹5,000	₹3,378	₹2,282	₹1,542

The table is in present-day rupees at 4% inflation a year, the RBI's target (author calculation). A subscriber who joins at 18 waits 42 years, and ₹5,000 then buys what about ₹963 buys now. If inflation averages 6%, the top of the RBI's tolerance band, ₹5,000 is worth about ₹1,559 after 20 years and ₹871 after 30.

A fixed pension is not worthless. For a person with nothing, even ₹1,500 in real terms matters, and the government guarantee has value. Our view is that the scheme should say plainly, at enrolment, what the pension will buy in current rupees.

What the evidence suggests

Put the two halves together. India already uses one default: enrolment through a bank, with automatic debit. The US evidence says defaults are strong for participation and weak for the level of saving. The APY fits that pattern, with strong enrolment and a pension level that is frozen. The obvious fix borrows from Save More Tomorrow: let the contribution and the pension step up automatically as a subscriber's income grows, on a pre-commitment made at enrolment, and index the pension.

We are not claiming this would work in India. Nobody has tested it here, and the public numbers we found count enrolments rather than the share of subscribers who keep paying for 20 years. That second number matters most.

There is also an inclusion problem. In a formal job the employer is where a default lives. In the informal economy there is no employer, so a default has to live somewhere else: in the bank account, the payment app or the welfare transfer. One untested idea of ours would be to attach a pension opt-out to payments that already reach informal workers. It would need strict consent rules, because a default that takes money from poor households can do harm as well as good.

Financial education still has a role. It helps people understand a choice. A default makes the choice for the people who never get round to it, and in the US company study above that was 63% of employees before the switch.

What to watch

Whether the government revises the APY slabs or adds indexation.
Data on how many subscribers keep contributing, as well as how many enrol.
Whether women's share of new enrolments, about 55% in 2024-25, holds.