Nepal’s economic transformation is accelerating and as the country pushes toward lower middle-income status and positions itself for large-scale, private sector-led growth, the structure of its economy is shifting and a new middle class is emerging.
Across the world, countries have grappled with the challenge of growing their economies and middle classes while sustaining social safety nets that are both effective and politically viable. Against this backdrop, Nepal’s latest policy direction carries significant implications. On May 29, 2026, the government unveiled its largest and most ambitious budget to date NPR 2.12 trillion (USD 13.85 billion), introducing both expansions in social security and a shift toward more needs-based targeting of entitlements. Alongside this progress, a fundamental policy challenge remains unresolved: how to expand economic opportunity while ensuring a robust and inclusive system of social protection. This piece explains why Nepal should continue moving toward a universal social protection system rather than a narrowly targeted one, particularly as it pursues rapid economic growth.
Why Social Protection Matters
Social protection provides security for individuals, cohesion for societies under stress, and financial buffers against increasingly frequent environmental shocks, while enabling governments to manage structural economic change without triggering broader instability. The costs of weak social protection include rising inequality, entrenched poverty, labor market informality, and growing public discontent, dynamics compounded by climate change. Social protection is therefore a necessary condition for a stable and resilient society, forming a core part of the social contract between states and citizens. Given Nepal’s high climate vulnerability, social protection serves as core climate infrastructure rather than a separate policy domain.
The International Labour Organization has consistently called for universal social protection, referring to universal coverage for all citizens within a polity, entitled irrespective of socio-economic standing. The ILO emphasizes that sustained investment in universal coverage addresses life-cycle risks such as childhood vulnerability, disability, and old age, while strengthening resilience to climate-related shocks. Crucially, universal systems also help sustain the broad political coalitions required to keep social protection funded and effective over time.
The Current State of Social Protection in Nepal
Historically, households and individuals have found social security through family, kinship, and community networks that absorb risk by pooling funds and through care work. However, this social capital is increasingly under strain, as individualization of lifestyles and rising out-migration erode the density of these networks.
Nepal’s formal system exists in a complementary manner to these informal structures of social support and is based in social security allowances and social insurances, based on a contributory basis. The Social Security Fund (SSF) was established in 2011 AD (2068 BS), followed by the Contribution-Based Social Security Act (CBSSA) in 2017 AD (2074 BS).
Relative to South Asia, Nepal started early with social protection, mandating in 1994 AD (2051 BS) an old age allowance as a nearly universal core social policy. As a young democracy, Nepal’s significant progress with social protection has been consequential, even as low fiscal capacity constrains the state’s ability to redistribute at scale. In FY 2020/2021 AD (2077/2078 BS), coverage of at least one social security benefit was to around 33% of the population.
In fact, Article 43 of the Constitution of Nepal recognizes social security as a fundamental right. This right is extended to poor and vulnerable citizens, including indigent citizens, single women, persons with disabilities, children, those unable to care for themselves, and members of tribes on the verge of extinction. Implementation is distributed across all three tiers of government, with federal and provincial policy coordination translating into allowance disbursement primarily through local governments. In practice, this constitutional guarantee takes the form of several targeted allowance programs, including senior citizens’ allowance, single women’s allowance, a child grant for those under five in select districts and all Dalit children, disability allowance, and endangered ethnicity allowance.
Alongside these allowance programs is the contribution-based SSF for formal sector workers. This operates on a high monthly contribution rate, with employees and employers together contributing 31% of an employee’s basic salary, split between 11% from the employee and 20% from the employer. This architecture is closely tied to the Labor Act, which defines formal employment relationships and, by extension, who is obligated to contribute to and eligible to draw from the SSF, which includes healthcare and maternity-related benefits, compensation for workplace safety, family allowance in case of death, and retirement benefits through contributions.
Nepal’s social protection system faces a set of interlocking structural constraints. Limited fiscal capacity keeps spending modest by global standards. A 2021 IMF assessment estimates social security expenditure at around 4% of GDP, or 2.2% when health spending is excluded. At the same time, weak enforcement of labor laws and fragmentation across the federal system continue to limit the effective reach of existing provisions. Low awareness of social protection schemes further undermines delivery. A 2022 ILO study on Nepal’s contributory Social Security Fund (SSF) identifies trust-building among workers and employers, and the management of contributor expectations, as central challenges, pointing to the need for a broader societal shift in how social security is understood and valued.
The dominance of informality remains a core constraint. With a large share of the workforce outside formal employment, contribution-based mechanisms such as the SSF struggle to achieve meaningful coverage. Distributional outcomes reflect this imbalance, with the richest quintile receiving 34.7% of total social protection benefits, compared to 21.9% for the poorest quintile, many of whom are concentrated in the informal sector and effectively excluded from contributory schemes. As the nature of work evolves, particularly with the expansion of platform and gig work, this model faces growing pressure to adapt, both in how “work” is defined and in how contribution mechanisms can extend beyond conventional employer–employee relationships.
Coverage gaps are also pronounced across specific categories. Nepal’s maternity protection rate stands at just 7.4%, far below the South Asian average of 74.7%.
Figure 1: Regional and global comparison on effective coverage for maternity protection, percentage
Source: ILO, 2023
Furthermore, access to formal social protection in Nepal is conditional on citizenship, which further marginalizes an estimated 6.7 million people who are stateless, particularly affecting refugees and single women’s children who have been systemically excluded from citizenship certificate provisions.
Finally, with a significant share of Nepal’s working-age population employed abroad, the portability of social security entitlements remains largely unresolved. Enabling migrant workers to accrue and access benefits across borders will require more proactive bilateral engagement with destination countries, an area that remains underdeveloped despite its importance for Nepal’s labour-exporting economy.
Current Policy Trends
Under the 16th Development Plan (FY 2024/2025- FY 2028/2029), the government aims to extend social protection coverage to the informal sector, with a goal of reaching 60% of the population by 2028. In December 2025, the Ministry of Labor, Employment, and Social Security under the Sushila Karki-led interim government established after the September 2025 protests, together with the ILO and the SSF, announced a National Campaign on Social Security for Informal Workers and the Self-Employed to expand coverage towards informal workers. The current government has continued this direction, committing to include informal and gig workers in the SSF and setting an ambitious mid-July 2026 deadline for their registration.
At the same time, Rastriya Swatantra Party (RSP), in its March 2026 election manifesto outlined a parallel vision for reform, with a strong emphasis on preventing misuse. It frames social justice as contingent on economic capacity and the long-term sustainability of the welfare state, and translates this into an administrative agenda centered on making social security “effective, transparent, and targeted.” Proposed measures in the manifesto include building a comprehensive database, refining prioritization criteria, directing resources toward those most in need, and minimizing duplication and leakages, through needs-based targeting, referring to assessing eligibility for social allowances.
These priorities are reflected in the government’s latest budget, which combines expanded coverage with a stronger emphasis on means-tested targeting, alongside an allocation of NPR 120 billion (USD 786.7 million) for social security.
The budget expands key benefits, including doubling the child nutrition allowance for Dalit children to NPR 1,000 per month and continuing nutrition support in 25 districts. The budget further signals a broader push toward labor formalization, through measures such as worker registration, basic labor standards, and efforts to bring informal and gig workers into formal social protection systems. At the same time, the budget introduces the “Sakkne lai Todau, Nasakkne lai Jodau, encouraging those who are able to voluntarily forgo benefits in order to maximize efficient usage of social welfare funds.
The proposed voluntary renunciation campaign in the FY 2026/27 budget, while framed as an appeal to solidarity, may contribute to a gradual erosion of the principle of universal entitlement. This stands in contrast to programs such as the Senior Citizens’ Allowance, which has maintained near-universal coverage since 1995 and, in doing so, secured broad-based public legitimacy. Such models align more closely with global evidence and with the ILO’s advocacy for universal social protection floors.
Why Targeting Warrants Reconsideration
Using a needs-based approach in social protection may appear to be the fiscally responsible choice under resource constraints. However Nepal’s experience, alongside a substantial body of comparative research on welfare systems in developing countries, suggests that a targeting-first approach to social protection warrants careful scrutiny due to two compounding problems.
First, needs-based targeting tends to produce high exclusion errors. Administratively complex eligibility criteria often filter out many of the very households the system is intended to reach, particularly in contexts like Nepal where institutional capacity is uneven. As a result, targeted systems frequently fail to deliver benefits to a significant share of the poor.
Second, targeting weakens the political and fiscal foundations of social protection over time. By designating a narrow group of beneficiaries, it encourages the broader tax-paying population to view recipients as a separate, dependent category rather than as fellow citizens with a shared stake in the system. This dynamic erodes the social contract, reducing public support and leaving targeted programs more vulnerable to underfunding compared to universal systems that rest on wider and more durable political coalitions.
These structural weaknesses are compounded by how targeting operates in practice. Targeted programs are often narrowly defined and rely on selection mechanisms that are costly, administratively burdensome, and prone to inaccuracy and corruption. In turn, this creates additional barriers to access, with eligible individuals either excluded by design or discouraged from applying due to stigma. In Nepal, such stigma is at times institutionally reinforced through practices such as publicizing beneficiary lists or promoting voluntary renunciation of benefits in exchange for symbolic recognition.
Targeting the poorest may appear to be the fiscally responsible choice under resource constraints, however the evidence clearly shows that targeting also requires high administrative costs to effectively reach the poorest. In effect, it risks undermining both the effectiveness and the rights-based foundation of social protection, limiting access to what is constitutionally guaranteed.
Way Forward
As Nepal seeks to graduate from a Least Developed Country status and its middle class grows, the country must ensure redistribution is not an afterthought. Nepal’s social protection system has made significant progress over the past decade and a half, from the establishment of the Social Security Fund to the expansion of allowance programs reaching millions. Recent reform plans have also ensured greater inclusion of the informal and gig sectors in the contributory social security architecture. Sustaining these gains will require resisting a shift toward an increasingly narrow, needs-based social allowance model, even as fiscal pressures and calls for efficiency intensify. Moving forward, sustaining a robust social protection system, rooted in universal coverage for social allowances and expanded inclusion in social insurance, will help repair the social contract and be a key engine and springboard for an evolving Nepal.
Manju von Rospatt is a Kathmandu-based research fellow at the Nepal Economic Forum. She is interested in international affairs, climate justice, arts and culture, and migration studies. She has an MA in Development Studies from the International Institute of Social Studies in The Hague, Netherlands focusing on social policy and writing her thesis on the Nepali diaspora in the US.
