Ris­ing pen­sion bur­den poses a prob­lem

China Daily (Canada) - - FRONT PAGE -

Pre­mier Li Ke­qiang has said in the Gov­ern­ment Work Re­port that ba­sic pen­sion stan­dards will be raised by 10 per­cent this year. Although this re­flects the gov­ern­ment’s con­cern about re­tirees, it has sparked a de­bate on the sus­tain­abil­ity of the pen­sion scheme be­cause the au­thor­i­ties have also de­cided to ex­tend the re­tire­ment age.

Ac­cord­ing to the lat­est of­fi­cial data, in 2013 the na­tional av­er­age pen­sion was 1,914 yuan ($305), or about 43 per­cent of the av­er­age monthly wages be­fore re­tire­ment, and the ac­cu­mu­la­tive bal­ance of the na­tional pen­sion fund was 2.83 tril­lion yuan, or 5 per­cent of GDP. The over­all pen­sion in­come and ex­pen­di­ture in 2013 was 2.17 tril­lion yuan and 1.85 tril­lion yuan, ac­count­ing for 3.8 per­cent and 3.2 per­cent of GDP.

Ur­ban pen­sion funds are man­aged by lo­cal gov­ern­ments, not the cen­tral gov­ern­ment, and there are 2,000-odd fund pools na­tion­wide. Com­pared with some other coun­tries, this is a low so­cial pool­ing level and can se­ri­ously harm the fi­nan­cial sus­tain­abil­ity of the pen­sion in­sur­ance sys­tem. Specif­i­cally speak­ing, un­der the cur­rent sys­tem, two ex­plicit pen­sion debts have be­come a cause of con­cern.

First is the empty per­sonal ac­counts. The per­sonal ac­counts have al­ways been empty since they were es­tab­lished two decades ago, with the pre­mi­ums paid by em­ploy­ees and em­ploy­ers hav­ing been used to pay re­tired peo­ple’s pen­sion.

The cen­tral gov­ern­ment started ex­pand­ing pi­lot projects in 2001 to solve the “empty per­sonal ac­counts” prob­lem. The real con­tri­bu­tions to per­sonal ac­counts across the coun­try add up to 415.4 bil­lion yuan, with the credit on ac­count reach­ing 3.51 tril­lion. The bal­ance of China’s pen­sion in­sur­ance fund is 2.83 tril­lion yuan, so the­o­ret­i­cally the gap in pen­sion fund is not se­ri­ous. But since the bal­ance is con­cen­trated in the eastern re­gion, it is dif­fi­cult to achieve fi­nan­cial de­fined con­tri­bu­tion to per­sonal ac­counts be­cause of the low so­cial pool­ing level. A de­fined con­tri­bu­tion plan is a type of re­tire­ment scheme in which the em­ployer or em­ployee, or both con­trib­ute to a pen­sion fund on a regular ba­sis.

Sec­ond, al­most half of China’s prov­inces, es­pe­cially the cen­tral and west­ern prov­inces, can­not make ends meet when it comes to pen­sion pay­ment; they rely on fi­nan­cial sub­sidy to meet their pen­sion ex­pen­di­ture. In 1998, pen­sion trans­fer pay­ment amounted to only 2.4 bil­lion yuan, which sharply in­creased to 65.1 bil­lion yuan in 2005 and 301.9 bil­lion yuan in 2013. From 1998 to 2013, the over­all fi­nan­cial trans­fer pay­ment added up to 1.82 tril­lion yuan, which is equal to about two-thirds of the en­tire pen­sion fund bal­ance.

With­out sys­tem­atic re­form th­ese two ex­plicit pen­sion debts will in­crease with each pass­ing year. In fact, the sys­tem de­sign is un­rea­son­able, be­cause all pen­sion funds are de­posited in banks, mak­ing them cheap de­posits for the banks.

The ex­ist­ing sys­tem has two re­ces­sive pen­sion debts too. First is the per­sonal ac­counts’ re­liance on fi­nan­cial sub­sidy. Per­sonal ac­counts have in­her­ent de­sign de­fects de­spite be­ing part of de­fined con­tri­bu­tion plans on pa­per. If an ac­count holder dies be­fore re­tire­ment, the en­tire credit bal­ance has to be in­her­ited by his/her fam­ily. And if the ac­count holder lives a long life, he/she will re­ceive pen­sion till his/her death. This shows the pen­sion fund has fi­nanc­ing gaps which can be filled only by a so­cial pool­ing fund, that is, public fi­nance.

Sec­ond, the rapidly in­creas­ing aging pop­u­la­tion will ex­ert more pres­sure on so­cial pool­ing funds. At 14.9 per­cent of the to­tal pop­u­la­tion in 2015, the per­cent­age of peo­ple aged 60 or above in China is lower than that in the G8 coun­tries. But in 2049, the per­cent­age of se­nior cit­i­zens in China’s pop­u­la­tion is es­ti­mated to in­crease to 33.9 per­cent, which will be higher than that in ma­jor de­vel­oped coun­tries such as the United States, the United King­dom, France and Canada.

More­over, the pen­sion in­sur­ance scheme of not only ur­ban res­i­dents but also ru­ral peo­ple de­pends on fi­nan­cial sub­sidy. In 2013, the over­all fi­nan­cial sub­sidy for the pen­sion sys­tem was about 500 bil­lion yuan, or 0.88 per­cent of GDP and 3.9 per­cent of the fis­cal rev­enue. This is ex­pected to in­crease in the com­ing years.

Th­ese de­vel­op­ments and the fact that the Third Plenum of the 18th Cen­tral Com­mit­tee of the Com­mu­nist Party of China in 2013 an­nounced that ac­tu­ar­ial bal­ance would be main­tained in the ba­sic pen­sion sys­tem and the per­sonal ac­count sys­tem would be im­proved in­di­cate a trans­for­ma­tion from a fi­nan­cial de­fined con­tri­bu­tion to a no­tional de­fined con­tri­bu­tion plan. The au­thor is direc­tor of the Cen­ter for In­ter­na­tional So­cial Se­cu­rity Stud­ies, af­fil­i­ated to the Chi­nese Academy of So­cial Sciences.


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