By Satyabrat Borah
The pension system for government employees in India has undergone significant transformations over the past two decades, reflecting a delicate balance between ensuring financial security for public servants and maintaining fiscal sustainability for the nation. At the heart of this evolution lies the Old Pension Scheme (OPS), a defined benefit plan that provided retirees with a guaranteed monthly pension equal to 50 percent of their last drawn basic pay, adjusted periodically for inflation through Dearness Relief. This scheme, inherited from the British era, offered unparalleled security: no contributions were required from employees, the government bore the entire cost, and families received continued support in the event of the employee’s demise. For millions of government workers, OPS represented not just financial stability but dignity in retirement after years of dedicated service to the country.
However, the unfunded nature of OPS posed growing challenges. As India’s workforce expanded, life expectancy increased, and salaries rose with periodic pay commissions, pension expenditures ballooned. By the early 2000s, pension outgo had become a substantial burden on the exchequer, diverting funds from critical areas like education, healthcare, and infrastructure. Studies highlighted that without reform, this liability could strain future generations, as current taxpayers funded pensions for past employees—a phenomenon known as intergenerational inequity. In response, the central government introduced the National Pension System (NPS) in 2004 for new recruits. NPS shifted to a defined contribution model, where employees contribute 10 percent of their basic pay plus Dearness Allowance, matched by a government contribution (initially 10 percent, later raised to 14 percent). The accumulated corpus is invested in market-linked instruments such as equities, bonds, and government securities, aiming for higher returns over the long term. At retirement, up to 60 percent can be withdrawn as a lump sum (tax-free), while the remainder purchases an annuity for monthly pension payments.
While NPS addressed fiscal concerns by creating a funded corpus and reducing unfunded liabilities, it introduced uncertainty. Pension amounts depend on market performance; poor returns could mean inadequate income in old age, especially amid inflation or economic downturns. Employees voiced strong dissatisfaction, arguing that public service jobs often involve lower salaries during active years, compensated by post-retirement security. Protests erupted, and several states like Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh reverted to OPS for their employees, despite warnings from bodies like the Reserve Bank of India about escalating costs potentially crowding out developmental spending.
Recognizing these grievances, the central government launched the Unified Pension Scheme (UPS) in 2024, effective from April 1, 2025. UPS serves as an optional alternative under the NPS framework, allowing existing NPS subscribers to switch irrevocably. It retains the contributory structure,employees contribute 10 percent, while the government ups its share to 18.5 percent,but guarantees benefits akin to OPS. Employees with at least 25 years of service receive 50 percent of the average basic pay over the last 12 months as pension, with a minimum of Rs 10,000 monthly after 10 years. Dearness Relief adjusts for inflation, family pension is assured at 60 percent, and a lump sum payment (1/10th of monthly emoluments for every six months of service) supplements gratuity without reducing the pension. As of early 2026, UPS has gained traction, with central employees exercising options and some states considering adoption, though uptake varies.
Comparing the three schemes reveals stark differences. OPS is fully government-funded with zero employee contribution, delivering fixed, inflation-indexed pensions but imposing heavy unfunded burdens—estimates suggest reverting nationally could multiply costs several times over NPS levels. NPS minimizes government liability through contributions and market investments, offering potential for higher corpora but exposing retirees to volatility. UPS strikes a middle path: contributory yet guaranteed, providing predictability without the full fiscal strain of OPS. For risk-averse employees valuing stability, UPS or OPS appeal more; those optimistic about markets might prefer NPS for larger lump sums.
Yet, even with UPS in place, demands for OPS restoration persist into 2026. Employee unions argue that while fiscal prudence matters, the government’s primary duty is to safeguard those who serve the nation. Public servants often accept modest pay scales, remote postings, and demanding roles, relying on retirement security as deferred compensation. Market-linked schemes like NPS leave retirees vulnerable, especially lower-grade employees with smaller corpora. Moreover, a glaring disparity fuels resentment: Members of Parliament and state legislators continue to enjoy generous pensions under separate laws. Even a single term qualifies them for lifelong benefits, often starting at substantial amounts with incremental increases for additional terms, plus Dearness Relief—all funded by taxpayers. Many politicians draw dual pensions if they served in both houses or held prior government posts. Critics highlight this as inequity: decades of service for ordinary employees yield uncertain or contributory pensions, while brief political tenures guarantee lavish security.
This perceived double standard amplifies calls for equity. If lawmakers retain OPS-like benefits, why deny them to bureaucrats, teachers, police, and other frontline workers who execute policies on the ground? Restoring OPS, proponents assert, would boost morale, attract talent to public service, and honor long-term contributions. In states that reverted, employee satisfaction reportedly rose, though at the cost of strained budgets.
On the fiscal side, the central government maintains that full OPS restoration is untenable. Pension expenditures already form a significant budget portion, and revival could derail deficit targets—projected at 4.4 percent of GDP for 2025-26 amid ongoing consolidation efforts. Resources must prioritize growth drivers like infrastructure and social welfare. UPS, officials contend, offers the best compromise: assured benefits funded sustainably through higher contributions and corpus investments.
Nevertheless, considering employees’ future warrants serious reconsideration of OPS. In an era of rising living costs and longer lifespans, retirement anxiety undermines productivity and well-being. Government service demands sacrifice; denying secure pensions risks eroding public trust. While UPS marks progress, it falls short of OPS’s complete assurance—no employee contributions, full government backing. With economic growth projected robustly and revenues improving, phased restoration could be feasible, perhaps limited to certain categories or offset by adjustments elsewhere.
Ultimately, the pension debate transcends numbers; it touches on fairness, gratitude, and societal values. Employees deserve peace of mind after lifelong service, free from market whims. Politicians’ privileges underscore the need for uniform standards. As India aspires to developed status, investing in human capital includes securing retirees’ dignity. Restoring OPS nationally may challenge budgets short-term but yield long-term gains in loyalty and efficiency. UPS provides a bridge, yet true security lies in reverting to the old scheme’s promise: a guaranteed, worry-free retirement for those who build the nation.
