The Economist details the challenges facing China’s pension system, which has grown considerably in the last several years but still must grapple with a number of structural inefficiencies:
Unlike individual accounts in nearby Hong Kong or Singapore, China’s nest-eggs are not carefully segregated and invested in financial portfolios, held in the contributor’s name. Instead, local governments use the money for other things, such as paying the bills, speculating in property, or paying the pensions of today’s retired—especially those shed by state-owned enterprises during the downsizings of the 1990s.
Despite this plunder of the pension pots, China has no shortage of saving and investment. It ploughed 49% of its GDP into investment last year, and almost 3% into foreign assets. The country as a whole is making provision for its future. But individual pension contributors do not have title to these assets. They must instead pray that their contributions will be honoured by local governments from whatever resources officials can muster in the future. And migrants fear losing their entitlements when they cross provincial lines.
One sensible reform would be for the central government to take charge of the pension system. It could fill the empty accounts, glue the fragmented system together and ideally make pensions much more portable. In terms of structure, the long-term goal should be to give individuals greater control over their own accounts, choosing their investments as they do in Hong Kong (with appropriate safety nets and so on). The problem here is that China still lacks the mature and open financial systems of Hong Kong and Singapore: its helter-skelter stock market is hardly ideal for retirement savings at the moment. So change will have to be gradual.
Although pension coverage is expanding, China is in the midst of a demographic shift that will see people aged
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