Analysis: China’s pension black hole a ticking time bomb

EIGHTY- YEAR- OLD Chinese farmer Guo Shuhe receives a state pension equivalent to just 55 yuan (R72) a month, not enough to buy a month’s worth of groceries, but enough, it seems, to risk punching a gaping hole in government finances.

Guo, whose palms are thick and rough from a life spent hoeing fields in southwest China, is one of over 150 million people covered by a rapidly expanding rural retirement scheme that is accelerating the nation’s slide into a pension crisis.

“Fifty-five yuan a month is little, but it’s better than nothing,” said Guo, rubbing his head with his hands at his home in Ledu County, a village 3 000m above sea level in China’s mountainous Qinghai province.

Guo, though, is fortunate because he also has the financial support of six children. But for younger and future generations of retirees, China’s traditional family safety net is disappearing, replaced by state-backed pension schemes tailored for a greying society.

Policymakers and economists have long been worried about the financial burden of China’s expanding patchwork of pension schemes, but those concerns have recently escalated as its rural pension scheme took off in the past three years.

The funding shortage is daunting: economists say it could blow out to a whopping $10.8 trillion (R90 trillion) in the next 20 years from $2.6 trillion in 2010, towering over China’s $3 trillion onshore savings, the world’s biggest hoard of domestic savings.

Time is not on China’s side. Its fast-maturing society and economy – thanks to a one-child policy and a rapid rise in living standards – demand better pension coverage in future.

Yet China is already straining to hold things up.

Funding capacity is not keeping pace with swift growth in pension coverage as China sticks to safe but low-yielding investments for its pension funds.

To make matters worse, retirements are getting pricier on an ageing population, a shrinking workforce, longer life expectancies, early retirements and generous pension payouts.

So pressing are China’s pension problems that analysts say they can no longer be ignored.

Xi Jinping, China’s president-in-waiting, must raise retirement ages and supply pension funds with state assets for financing after he takes power next year.

To give or not to give, China’s pension dilemma is not a sideshow. Good pension coverage will help Beijing remake the world’s number two economy to boost domestic consumption, cut export reliance, and dodge a middleincome trap that could ensnare the country anytime in the next two decades.

Giving millions of Chinese workers peace of mind about their retirement will encourage thrifty wage earners to spend more in coming years, standing in for American and European shoppers tightening their belts, economists say.

The number of Chinese over 65 years of age, at 123 million, virtually matches Japan’s total population, and is rising fast due to the onechild policy Beijing adopted in the 1970s.

According to the World Bank, China’s population has greyed in the past 40 years, whereas ageing societies in the US and the UK took a century to form.

The problem of growing old, fast, is most acute in the countryside, where thousands of villages are “hollowed out” as working adults abandon farms to migrate to cities in search of better lives, leaving the young and old behind.

The old-age dependency ratio, or the number of elderly people as a share of those of working age, will hit 34.4 percent in rural China by 2030, compared with 21.1 percent in urban areas, and up from 13.5 percent in 2008, according to the World Bank.

The cost of an expanding elderly class is hefty.

Many analysts believe China’s labour force will shrink from 2015, hurt by stubbornly low birth rates and an ageing populace, a trend expected to drive up wages in the world’s factory floor in years ahead, and henceforth global inflation.

To beat the demographic challenge, Beijing hastened the roll-out in 2009 of a voluntary pension scheme for 657 million rural residents, the equivalent of two US populations.

To get a minimum ¥55 a month in retirement, or a tenth of last year’s average monthly wage in the countryside, rural workers must pay at least ¥100 a year for 15 years.

At face value, China’s pension system should not drain state coffers since payouts start low.

Yet, an Organisation for Economic Co-operation and Development (OECD) study of global pension systems ranked China’s as among the most generous and least sustainable, after the Philippines.

China’s pension benefit as a share of retirees’ average lifetime wages, also known as replacement rate, stands at 78 percent for male workers, above an OECD average of 57 percent, France’s 49 percent, and the US’s 39 percent.

Trapped by rising costs and deficient funding, China spent about 40 percent of state earnings on pensions, compared with under 15 percent in Japan and the US, the OECD said. – Reuters