n April 10, the Chinese Academy of Social Sciences released The Pension Fund Actuarial Report 2019-2050. According to the report, if there are no changes to China’s pension fund, the fund will start to see a deficit at the national level in 2028, and in 2035, the pension fund will be depleted. At the local level, pension funds in 16 provinces and regions are expected to see a deficit in 2019.
According to official data, by the end of 2018, the value of China’s pension fund was about five trillion yuan (US$726b), equivalent to 17 months of pension payouts at the current level. As China’s population rapidly ages, it has become a consensus that China’s pension system will not be sustainable if no drastic measures are taken.
According to UN estimates, the ratio of population aged 60 and above in China will increase from 16 percent in 2017 to 35 percent in 2050. In 2040, it is estimated that one retiree will be supported by just two workers. Besides the aging population, the continued economic slowdown is putting further pressure on the pension fund. In an effort to stimulate the economy and reduce the tax burden for businesses, the Chinese government reduced the level of mandatory contributions made by businesses from 19 to 16 percent of employees’ salaries, which put more pressure on the pension system.
China needs to tackle the sustainability of the pension system with a systemic approach. First, China should start to postpone the retirement age. Currently, the official retirement age for men is 60, and 50 or 55 for women, depending on their jobs. Compared to most advanced economies, China has ample room to push back the retirement age. In past years, there have been proposals to this regard, but none has been put into effect, given popular objections to any reform to the retirement age. But as the problem becomes more serious, it is time to take the necessary steps. In so doing, China can take an incremental approach to gradually postponing the retirement age to 65 for both men and women over a 15-year period.
Second, China should focus on increasing the population base that contributes to pension funds, which can be done in several areas. Rather than the current two-child policy, China should move to allow people to have as many children as they want. The government should also encourage voluntary contributions to the pension fund by providing tax incentives, which is common practice in many countries. Moreover, the government needs to include more workers in the pension system. Official data shows that 403 million people, including 293 million urban employees and 110 million retirees, are covered by the system, while 130 million urban workers are not.
China’s current pension system was set up only in 1997 when the cradle-to-grave planned economy came to an end. To mitigate the impact of the reform, former employees of State-owned enterprises were automatically covered by the system although they made no contribution to the pension fund prior to 1997. In 2017, China announced its intention to shift 10 percent of the equity of selected SOEs to the pension fund. It is reported that stakes of 18 SOEs valued at a total of 75 billion yuan (US$10.9b) were already transferred to the pension fund by the end of 2018. China should establish a permanent mechanism in this regard. In the meantime, China should allow pensions fund to enter the investment market. Not only it will increase the value of the pension fund, the fund could provide a key role in promoting economic development.
Finally, China should scrap the privileges enjoyed by public servants. Under the current policy, public servants are exempt from paying pension contributions, but at the same time are granted a pension payment after retirement that is equivalent to 80 percent of their salary, a level two to three times higher than ordinary workers. Not only is this contrary to the principle of equality, but it could become a major obstacle for the government in pushing forward pension system reforms. All in all, for an issue that will pose a long-term threat to China’s economy and social well-being, the Chinese government needs to adopt a more proactive and systematic approach.