n April 21, the Chinese government announced the creation of a private pension scheme to allow Chinese employees to invest and supplement funds in their pension accounts. It is considered a landmark move for China to tackle its rapidly aging population.
However, under the current policy arrangement, the impact of an individual pension scheme may be limited. For a long time, China rested on three fundamental tenets to build a robust pension system, namely: a government-run basic pension scheme, enterprise-run annuity schemes and individual private pension schemes.
China established a State-run basic pension system in 1997. According to data released by the Ministry of Human Resources and Social Security, the State-run pension fund now pays out an average monthly pension of 2,900 yuan (US$427). With an average pension replacement rate of 43.6 percent, it covers 426 million people, or about 30 percent of China’s total population.
Compared to the State-run pension fund, the coverage of the enterprise-run annuity schemes lags far behind. As of the end of the third quarter of 2021, the enterprise-run annuity schemes, which exists mostly among State-owned enterprises, only covered 28.37 million people, or about 5.6 percent of those covered by the State state-run basic pension fund.
A major reason is that the employer contribution rate to the State-run pension fund is already quite high (16 percent) and many enterprises lack the incentive to offer pension benefits to their employees. Big, profitable enterprises prefer to use salary and equity incentive plans to attract talent.
For small- and medium-sized enterprises, with their relatively low revenue and short lifespans, it is already difficult to comply with the mandatory pension contribution under the State-run system.
Participants in personal pension schemes would mostly be those already covered by the State run pension fund and/or the enterprise annuity programs. It means that while the private scheme may increase the pension replacement rate for people already covered by existing schemes, it will do little to promote overall pension coverage across the whole population. As those already covered can benefit further from tax deductions under the private pension scheme, it may actually further increase the inequality of pension benefits between groups.
Therefore, in designing personal pension schemes, the government must seek to make innovative arrangements to expand the overall coverage of pension benefits. For example, the government should make the housing fund transferable to pension funds. Currently, an employee can only use their housing fund to buy or rent a flat. By allowing it to be transferable to pension funds, it could better utilize the fund and increase the pension replacement rate. The government should also streamline and digitalize the administration of enterprise-run annuity schemes, to reduce the administrative barriers for enterprises to join schemes.
Most importantly, the authorities should strive to encourage small and micro businesses to join pension schemes. They should be allowed to contribute to the State-run pension scheme at a lower rate, rather than the rigid 16-percent contribution rate, and to suspend contributions under certain conditions. Their employees should be allowed to obtain pension benefits from multiple employers, so part-time and flexible workers can have access to pension benefits.
As for enterprise-run annuity programs and private pension schemes, they can be consolidated into an individual pension account, and employers in small and micro businesses can make flexible arrangements to make contributions to the accounts of their employees. After all, to tackle China's aging population, it is as important, if not more so, to grant more people access to pension benefits of any sort, as to increase the pension replacement rate of those already covered by existing programs.