An aging population, an underfunded pension system, and half-a-billion
workers who aren't covered could be a drag on economic growth.
If you thought the U.S. had a looming pension crisis, consider the situation
in China, where the population is growing older at an even faster pace and more
than half-a-billion rural and urban workers don't participate in state-run
social security schemes.
Because China generally limits each family to one child, the percentage of
its population that is working will peak by 2010 and the ratio of workers to
retirees will decline dramatically, from six to one in 2000 to two to one in
2040.
But China has not had time to build up enough assets in public or private
plans to finance retirement benefits. And it is saddled with unfunded pensions
from the pre-reform era, when industrial workers enjoyed a cradle-to-grave
security system.
As China began to restructure its state-owned enterprises in the 1990s,
millions of employees were laid off and allowed to retire early. The
responsibility for paying these so-called legacy pension benefits was left to
the 31 provinces.
China's implicit pension debt is now some $1.5 trillion, according to the
latest estimates by the World Bank, including all legacy pensions as well as
accrued obligations under China's more market-oriented pension system for urban
workers adopted in 1997. Under that system, employers pay about 20% of wages
toward a guaranteed schedule of benefits and employees contribute 8% of wages
into personal accounts that are supposed to be invested in government bonds and
bank deposits. The normal retirement age is 60 for men and between 50 and 55 for
women.
But most of those payroll taxes have not gone to fund the new pension system.
Instead, they were often "borrowed" by the provinces to pay the legacy benefits
due retired workers from the pre-reform era. This borrowing of payroll taxes is
particularly troublesome for the 8% of wages contributed by employees to
personal accounts.
Imagine what would happen if millions of Chinese workers found that their
personal accounts contain no actual assets, only notional credits entries in a
ledger based on a bank-deposit rate.
To help the provinces meet these legacy obligations, the central government
created the National Social Security Fund in 2000. This fund receives monies
from state-run lotteries as well as 10% of the proceeds of initial public
offerings of state-owned companies listed overseas.
The fund has also financed pilot programs to help provincial governments put
actual assets, rather than notional credits, into personal accounts. But even in
these pilot programs the personal accounts have been only partially funded. And
the total assets of the fund are less than $30 billion.
So what can be done?
First, the government should finance all legacy benefits out of general tax
revenues on a pay-as-you-go basis. Paying these legacy benefits is part of the
national cost of transitioning from a socialist to a market-based economy, and
China can afford these transition costs given its high rate of economic growth.
Second, Beijing should take over the administration of the new pension system
from the provinces. With 31 provinces, the pension system is a maze of disparate
rules. It would be more efficient and effective if payroll taxes were collected
by a national agency devoted to this task. If pension benefits were calculated
and distributed by one national agency, taking into account regional income
differences, that would increase the portability of benefits, so workers could
move easily from one province to another.
Third, the Chinese government should continue to develop other pension
vehicles to help those workers with insufficient or no retirement benefits. The
level of monthly pension payments is modest, especially in light of rapidly
rising standards of living in many parts of China.
To augment these benefits, Chinese firms have recently been allowed to offer
their employees enterprise annuities similar to defined-contribution plans in
the U.S.?in which workers choose payroll deductions during their careers and
receive benefit payments at retirement. But few such enterprise annuities have
been offered because regulatory and tax rules have yet to be clarified.
In contrast to the limited distribution of enterprise annuities, sales of
life insurance products have been growing rapidly in China, where savings rates
are much higher than in the U.S.
These products are often bought by Chinese families outside the government
pension system. In rural areas, for example, many farmers buy insurance products
in lieu of participating in the government's voluntary social security schemes.
In urban areas, some state-owned companies have bought group pension
insurance to supplement the modest benefits from the government's mandatory
pension system. If all these types of retirement programs were better funded and
invested, they could be important factors in deepening China's capital markets.
In turn, better capital markets would increase the returns to Chinese retirement
programs.
The National Social Security Fund, which has earned slightly more than 3% per
year, has the potential to become a major institutional investor, monitoring the
performance of Chinese public companies.
But even with higher returns, the pension gap in China is not likely to be
fully closed. As the number of workers per retiree declines, normal retirement
age should be moved back in China, especially for women, who have a life
expectancy of 74, compared with 71 for men.
In short, China must grow rich before it grows too old. While the Chinese
government has introduced some programs to meet this challenge, it is not yet
clear whether they will provide adequate retirement benefits to most Chinese
workers.
