BEIJING Oct 18 China is close to announcing
long-awaited reforms to its pension system, whose assets are
estimated to have already fallen $3 trillion behind projected
future payouts, as it seeks to create a sustainable safety net
for a rapidly ageing population.
The reforms, which may be announced as early as this month,
could include merging separate state and private sector employee
pension schemes, increasing coverage and broadening the range of
assets pension funds are invested in to boost returns and
improve efficiency, said sources with knowledge of the
As China seeks to transform its economy from the export and
investment-led model that drove two decades of growth towards a
future based on consumer demand, it faces the huge demographic
challenge of an already shrinking working-age population.
By 2035, according a report by Qinghua University released
in August, every two to three Chinese workers will have to
support one dependent.
"There's no way that if the system doesn't change the
problems won't get worse," said Dong Keyong, Dean of the School
of Public Administration at Renmin University. "The system won't
be able to cope, it will change."
The problem of ballooning old-age costs is familiar to many
developed countries facing the retirement of the "baby boomer"
generation. China is confronting it earlier than most emerging
economies due to the one-child policy introduced in 1979.
Experts have been warning for almost a decade that China may
get old before it gets rich. The Qinghua report said that China
was already 15 years behind in terms of restructuring its
An unchanged system could face a 68.2 trillion yuan ($11.2
trillion) pension shortfall by 2033, according to a report led
by Ma Jun, Deutsche Bank's chief economist for greater China,
released in June 2012. The report estimated that by this year
projected liabilities would exceed assets by 18.3 trillion yuan.
China's pension system has four main streams, each
administered separately and with vastly different payouts. The
most generous is reserved for civil servants and workers in
state institutions, with employees of private businesses covered
under a separate stream administered by local governments.
Pension coverage only began to be rolled out to rural
residents under a third scheme in 2009. A further programme
exists for urban residents who don't fall into either of the
first two streams. While significantly increasing overall
pension coverage, these two programmes offer only basic payouts.
Civil servants and other state sector workers can expect to
receive around 70 to 90 percent of their final salary at
retirement without making any contributions.
Those covered by the private sector system receive just 50
to 60 percent, despite a combined 28 percent salary contribution
made by employee and employer.
Local government officials running the private sector system
in some provinces have also taken to emptying the personal
accounts of contributors to meet obligations to current
retirees. According to a report last year by the Chinese Academy
of Social Sciences, more than 2 trillion yuan was missing from
individual accounts as of 2011.
"People are quite resentful. This is not a financial issue,
this is a political issue," said Zhao Yaohui, an economics
professor at Beijing University and a principal investigator in
a recent university report into ageing in China.
Two sources with knowledge of the discussions said that
plans to begin merging civil servant and private sector pension
schemes, and taking the latter out of local government control,
could be announced amongst the first round of measures, although
this would require overcoming opposition from civil servants.
Centralising pensions into national funds would improve the
efficiency of resource allocation and smooth regional
disparities that currently result in some provinces having
pension surpluses whilst others have huge shortfalls, analysts
Zheng Bingwen, the director of the World Social Security
Research Centre at the Chinese Academy of Social Sciences, an
influential government think-tank, said merely changing the
level of government that administers the system would be the
"slackers' option" when deeper structural reform was required.
"Which of these two paths the government ends up taking
depends on the determination of policymakers," he said, in a
interview with the Beijing News published on Wednesday.
RAISING RETIREMENT AGE?
Another contentious area is raising the retirement age,
currently 60 for men, 55 for female white-collar workers and 50
for female blue-collar workers.
"The state has been very reluctant to put out any policy or
law on the retirement age so far," said Ka Lin, a professor in
Zhejiang University's School of Public Administration.
Lin believes raising the retirement age would be seen by
many Chinese as the government going back on promises it made to
guarantee the welfare of its citizens.
Even amongst the leadership, opinion is divided over the
necessity of reforms.
Renmin University's Dong, who was formerly head of the
school's social security research institute, said there were
some in the leadership who argued that last year's contributions
and subsidies had produced enough reserves set aside to fund the
system for a year-and-a-half.
"It depends whether you are looking at this issue from a
short-term or long-term perspective."
The sources said another possible reform under discussion
was changing how the private sector system, the largest pension
stream by assets, invests its funds.
Pilot reforms in Guangdong Province have seen the National
Social Stability Fund running the investment since March 2012 in
place of local governments, who are only permitted to invest in
government bonds or park funds in low-interest bearing bank
This pilot could either be rolled out to other provinces, or
policymakers could establish a new centralised system organised
along similar lines, the Chinese Academy of Social Sciences'
Zheng told state media in July.
"The success of the pilot project is indicated in the better
returns of funds managed by the central team in Guangdong," said
Tracy Tian, Hong Kong-based Bank of America-Merrill Lynch China
strategist. "In 2012 the fund returned 7 percent, dwarfing the
less than 1 percent return by the other local funds."
($1 = 6.0995 Chinese yuan)
(Reporting By Natalie Thomas, Additional reporting by Umesh
Desai in Hong Kong; Editing by Alex Richardson)