A new study from IIM Indore reveals that India’s shift from the Old Pension Scheme to contributory systems has eased fiscal pressures but raises questions about adequate retirement income, especially for late entrants, prompting calls for broader reforms.
A new study from IIM Indore says India’s move from the Old Pension Scheme to contributory retirement systems has eased the state’s long-term fiscal strain, but left unresolved a harder question: how to make sure employees still receive enough income in retirement.
The research, led by Deepak Sethia and published in the Review of Income and Wealth, compares the National Pension System and the Unified Pension Scheme through an actuarial lens. It concludes that the National Pension System, which replaced the old guaranteed model in 2004, does not deliver the same retirement security for workers who enter government service later in life.
Under the old arrangement, pensions were tied to final salary and adjusted for inflation. The National Pension System changed that balance by shifting market and longevity risk on to workers, with employees contributing 10% of wages and the government 14%. According to the study, that structure can still produce an adequate pension for people who join young, but at a retirement age of 60 and a real investment return of 3%, the system meets the benchmark of replacing half of final pay only for those who entered by age 23 or earlier.
The Unified Pension Scheme, introduced in 2025, was designed to address that shortfall by guaranteeing a pension equal to 50% of final average salary, while requiring a combined contribution of 28.5% of wages. But the IIM Indore study says the scheme creates a different fairness problem: younger entrants may accumulate more than the actuarial cost of their own pensions, with the surplus channelled into a pooled fund that helps subsidise older entrants whose savings fall short. In effect, the state regains more of the funding burden it had tried to shed.
The study also suggests that a higher retirement age of 62 or 65 would improve the economics of both systems by extending contribution periods and shortening the time pensions are paid. It points to reforms seen in countries including Chile, China and Brazil, and argues for broader changes such as lifting the statutory Employees’ Provident Fund wage ceiling to Rs 15,000, requiring annuitisation and using targeted, means-tested state support for informal workers. LiveMint, in a separate report on the same research, said the findings show that matching the Unified Pension Scheme’s assured, inflation-linked outcome through a market-linked National Pension System corpus is difficult in most realistic scenarios.
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