Pension system needs reform
If the Chinese government does not carry out a timely and all-around reform of its pension system, the widening debt gap of China’s pension insurance capital will pull the government into a formidable debt crisis and threaten social security, according to a report.
The Chinese Academy of Social Sciences, a top think tank for the central government, issued a report on China’s social security on Dec 29, noting the gap in urban residents’ basic pension system by the end of last year was 86.2 trillion yuan ($14.37 trillion).
Workers retiring before the late 1990s, when a basic pension system was built up nationwide, need not pay their pension insurance, which was done by the state, and actually paid by the people retiring after the 1990s. The gap becomes wider as more and more people reach their retirement age.
By 2020, about 18 percent of China’s population will be above 60 years old, and the figure will rise to over 30 percent in 2050.
“If we do not reform the old system, the gap will become bigger and bigger,” Vice-Premier Ma Kai warned in his response to queries on the potential debt risks of the Chinese government. This is the first time the central authority clearly acknowledged the existence of the big gap and the worrisome trend if the problem is unchecked.
But reform is not that easy to do, because it is partially a historical issue, and increasingly a should not just try to squeeze the workers, but also take actions to make the civil servants pay their pension insurance as early as possible. The 40 million civil servants and staff working for public institutions need not pay their pension insurance under the current system. But their pension is about two to three times higher than average wage earners. If they can pay their pension insurance as others, they can contribute 280 billion yuan each year to fill the gap.
The government should also increase its payment proportion in the portfolio of the pension system. Statistics show social security only accounts for 12 percent of the Chinese government’s expenditure, compared with 30 to 50 percent for developed countries. If the Chinese government can increase the proportion to 30 percent, it can contribute more than 3 trillion yuan each year to fill the gap.
State-owned enterprises also need to increase their contribution to repay the country’s social security debt. They make more than 4 trillion yuan’s profit each year, only handing out about 5 percent of the profit to the government. If they can increase the ratio to about 20 percent, an international conventional level, they can contribute about 1 trillion yuan each year to fill the pension insurance gap.
Last but not least, the Chinese government must improve its management of such a huge capital pool of its pension insurance, preserving and increasing the value of the important money.