As Population Ages, Pension System Feels Strain

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 60 or above make up more than 30 percent of the population by 2050 (vs. 13 percent today), according to The World Bank. The chief economist of Haitong International Securities Group highlighted the need to reform China’ s pension system in a piece in June, and Bloomberg Businessweek’s Dexter Roberts calls the situation a “brewing crisis” in a Thursday report:

About half of China’s 31 provinces are unable to pay their retiree costs and rely instead on financial transfers from the central government. The central government says it has enough money to cover its pension liabilities for now, but there’s a debate about how long that will last. “Many say it will become a real problem within 10 years,” says Hu Yuwei, who works for Spanish bank BBVA and who is exploring possible partnerships with local pension managers. “For now, the government can use central funds or transfer money between provinces. But in the next 10 years, the amounts will become too big to simply move money around.”

In the same print edition, The Economist frames the fragmented pension system in the context of China’s Great Divide:

In the countryside local governments pay a basic pension which varies greatly depending on their financial health. Personal accounts supplement this, into which individuals may put money over their working lives, encouraged by matching contributions from the state. In the cities the main system combines social insurance, paid for by payroll taxes, with individual accounts, into which workers must pay 8% of their earnings.

But a kind of apartheid is at work, distinguishing urbanites from country folk, and locals from migrants. Ma Wanzhi, who now lives in Heijingying, enrolled in a scheme through her employer, a factory making the incense sticks for temples. Her 61-year-old sister, on the other hand, still lives in the neighbouring province of Hebei, where she collects a meagre pension of 80 yuan a month. She supplements her income by travelling to Heijingying to sell peaches by the roadside.

Like these women, many of China’s workers are highly mobile. Yet China’s pensions are not. In principle, workers may take their individual contributions with them if they move, as well as 60% of their employer’s. In practice, the system struggles to keep track of the money. Only a quarter of migrant workers in the cities were covered by pensions in 2010, compared with four-fifths of locals, according to Albert Park of the Hong Kong University of Science and Technology.


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