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China / Cover Story

Pension fund dilemma

By Li Jing and Chen Jia in Beijing (China Daily) Updated: 2012-03-28 10:39

'Empty accounts'

China started its pension system in 1997, combining joint social funds with individual accounts. The system is designed to allow the State to pay pensions with money collected from the younger generation: Employers pay the equivalent of 20 percent of an employee's monthly wage into the joint fund, while the employees themselves pay about 8 percent of their monthly wage into their individual accounts. The original plan was to pay pensions from the joint fund, while the money in individual accounts was to be managed and invested for future use.

However, the process has proved costly. The country is still in the process of increasing pension coverage and the amount received by retirees has been raised several times during recent years, meaning that the government has had to use money from individual accounts to cover the expense, resulting in a large number of "empty accounts" (accounts with no money), according to Zheng.

In 2004, the Ministry of Labor and Social Security (later renamed the Ministry of Human Resources and Social Security) announced that the individual accounts had a deficit of 740 billion yuan. Those are the only official statistics available, but Zheng Bingwen from the CASS has estimated that the current scale of empty accounts is 1.3 trillion yuan, despite a decade of, largely unsuccessful, attempts to refuel them through government subsidies.

Northeast China's Liaoning province, for instance, faced a pension shortfall of 14.65 billion yuan in 2010 and had to borrow money from individual accounts, despite receiving an annual central government subsidy of 1.44 billion yuan since 2001.

Although some analysts argue that it is not unusual to see "nominal accounts" - that is, pension funds devoid of real cash - in other countries, the huge deficit should set alarm bells ringing and prompt China to reform the existing pension fund management system to support the growing number of elderly people in the coming decades, said Zheng.

In 2010, each pensioner was supported by the combined contributions of five workers, but by 2020 three workers will have to provide the funds, further increasing the tax burden and potentially storing up another problem that will have to be dealt with by future generations.

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