Old Pension, New Pension or Unified Pension?

Why India moved government employees from guaranteed pensions to a contributory system in 2004, why some states went back, and how the 2025 Unified Pension Scheme tries to balance the two.

How to pay pensions to government employees is one of India’s most debated fiscal questions.

The Old Pension Scheme

Under the Old Pension Scheme, or OPS:

Retired employees receive a pension of about 50 percent of their last salary.
It rises with dearness allowance as inflation rises.
Employees contribute nothing.
It is paid from the government’s current budget, not a fund.

The shift to NPS

As life expectancy rose and pension bills grew, the central government moved new employees (except the armed forces) joining from January 2004 to the National Pension System, or NPS:

Employees contribute 10 percent of salary, and the government contributes 14 percent.
Money is invested in markets.
Retirement income depends on investment returns, with no guaranteed amount.

Most states followed.

The reversal in some states

From 2022, several states, including Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh, announced a return to OPS, responding to employees’ demands.

The Unified Pension Scheme

In 2024, the central government announced the Unified Pension Scheme, or UPS, effective from April 2025, as an option for central employees under NPS. It promises:

An assured pension of 50 percent of average basic pay in the last 12 months before retirement, for employees with 25 years of service.
A minimum pension and a family pension.
Inflation indexation.

Employees still contribute 10 percent, while the government’s contribution rises.

The economic debate

For guaranteed pensions:

Security for retirees who served the public.
Makes government jobs attractive.

Against:

Fiscal burden: pension costs grow as more employees retire and live longer, crowding out spending on health, education and infrastructure. The RBI and many economists warned that returning to OPS could strain state finances.
Intergenerational fairness: future taxpayers bear the costs.
Government employees are a small share of the workforce; most Indians have no pension at all.

Two teachers

Two teachers retire after 30 years. One joined in 2002 and receives about half her last salary for life under OPS, rising with inflation. The other joined in 2006 under NPS; her pension depends on her investment account. Their different outcomes fuel the debate.

Thinking the Old Pension Scheme is free because employees don't contribute

OPS is funded from future budgets. Its costs grow as retirees increase and live longer.

Key takeaways

OPS paid about half of last salary, funded from current budgets.
New central employees moved to the contributory NPS from 2004.
Several states returned to OPS from 2022.
The Unified Pension Scheme from 2025 offers an assured pension within a contributory system.