Causesbehind Intentions of Raising retirement age Table of Contents 1. Unfavorable Demographics 32. Excessive Fragmentation: 33. Insufficient Funding: 44. Limited Investment Choices: 5Bibliography 7 The Chinese pension system as constituted currentlyfaces an ample number of challenges that will influence the presentarrangements unsustainable in the future. 1.
UnfavorableDemographics China has been experiencinga “demographic dividend”- whereby an economy is boosted by a change in theaging structure of the country which is mainly due to low fertility andmortality rates. In other words, China has a larger workforce and few retirees.It has allowed the country to finance pension benefits to the retirees from itscurrent pension contribution for a long time. However, this situation will ceaseonce the population ages. The ‘one child’ policyopted by China is now clearly outdated: as China has to support its currentpopulation through its own financial resources.
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The existence of one-childpolicy will worsen the underlying challenges faced in the demographics in termsof providing pension fund benefits to the population. The increase in theretirement age of the retirees is another means of increasing older workforce. Thecurrent retirement age for urban workers is 55 for men, managerial or technicalwomen and 50 for the rest of the population.
These retirement ages have been ineffect since 1950s where the life expectancy was 45 years at birth. In therecent years, the life expectancy has risen up to 73.5 years which rendersthese low retirement ages unsustainable in future. It is to be noted, that theretirement age in China is relatively lower by international standards. Theretirement age as per Organization of Economic Cooperation and Development(OECD) is 64 for men and 63 for women.2. ExcessiveFragmentation: The pensions system in China is largelyoccupied by UEPS, which is explained as the benefits attained outside theservice for the working population.
It mainly refers to the urban employee’s atlarge corporations inclusive of all foreign, private firms and SOEs. Recently,the central government has introduced two voluntary pension systems; one forrural workers and another for the non-employed urban residents. There is a highlevel of fragmentation within UEPS, where each part is financed by the localcity or provincial government with varying rules. This is a major hindrance inleading to lower labor mobility in China.
The division of pension systemsinto two subsystems as mentioned above has resulted in fragmentation within thepopulation along with the government decision involved in the implementation ofpolicy. In 1990s, it would have been very difficult to implement UEPs to therural areas in terms of economic and administrative factors involved.Therefore, the decision to limit the pension pooling at local level seemed tobe least disruptive and burdensome on the central government. The trend of internal migrationincreased in China when the UEPS was under formulation in the early 90s, thereforethe less focus was given towards the migration of population within theprovinces or within the same province. In any event, the central government hasnow decided to accelerate migration from rural to urban areas withoutundertaking major hukou reforms. The centralization of the pensionsystem is another option. In the recent times, the government has provided morefocus towards the labor mobility and pension fragmentation. In 2009, StateCouncil issued guidelines for the workers within UEPs that intend to movebetween the cities, it was clarified that the workers will have the right totransfer both components of their pension – accrued social benefits andaccumulation in the individual accounts.
However, as mentioned above theseworkers face drastic hurdles to transfer their pension benefits. In addition tothe scenario above there has been a drop of 20% in pension contributions by theemployers. Therefore, it is important for the government to take initiatives tostandardize the current pension systems and take control of UEPS. Thegovernment should establish a nationwide database for urban workers which couldbe the first step in reforming the national pension system.
In order to harmonizethe various pension plans for more sustainable future, the various componentsof the pension systems, the UEPS as well as the segmentation within the samepension system should be unified. The eligibility rules and benefit levelsshould be as uniform as possible in their legal interpretation and applicationacross the country. In reality, this reform will be decades away.
The centralgovernment should allow the benefits to vary as per the average cost of livingper person. By reducing disparities among pension programs will be helpful inremoving barriers in labor mobility and will be helpful to China’s large groupof temporary migrant workers, which is estimated to be 150 to 260 millionpeople out of which many people have opted out of participating in the UEPS bythe virtue of holding hukou.3. InsufficientFunding:The UEPS is funding by employer andemployee contributions.
The employer is entitled to contribute a 20% of anindividual wages while on the other hand an employee individually contributes atotal of 8% of its earnings. These employer contributions forms a major part oflocal funding and constitutes as a part of a pay-as-you-go (PAYGO) definedbenefit plan whereby upon retirement, the employee becomes entitled to amonthly distribution of the amount from the contribution scheme based on anannuity factor of 139 months. The UEPS largely operates on PAYGOschemes and an individually is benefited from these schemes substantially overretirement. As the population ages, the PAYGO schemes will be unsustainable asthe contributions will be diminished over time. If the pension schemes areregulated by the government, it will be more beneficial over time if thecontributions will be invested and accumulated over the years to fund thefuture benefits. The central government shouldconsider a move towards partial pre – funding of the UEPS for workers.
It canbe categorized in three segments as follows: · Workers starting after a given date andbefore 13th five year plan period (2016 – 2020) using 2017 forillustrative purposes – their pensions would be fully funded. The employercontributions will be set aside and invested in a manner to pay scheduledbenefits in future.· The pensions will be partially fundedfor the existing workforce. The benefits accrued prior to the starting date,say in 2017, would be paid out of future revenue upon the worker’s retirement.But beginning in 2017, the employers’ social pooling contributions would be setaside and invested to pay the benefits that accrue after 2017.· The central government should introducea new law, stating that after 2017, the contributions by new and existingworkforce in their pension schemes cannot be burrowed or used for any otherpurpose other than the funding of an individual account.The government shouldalso make efforts to complete actual funding of individual accounts.
The abovementioned three way proposal would involve very high transitional costs. Thebenefits attained by the retirees are paid from the current pensionscontributions would be required to be financed by some other means. Pre-2017,employees that retire would be paid a portion of their pensions in advance andthe remaining will be finance by another means. On the other hand, there havebeen no rough calculations of the cost of implementing changes in the pensionplans. However, it can be noted that as a rough approximation, it may likelyinvolve trillion dollars to implement this scheme. These transition cost forpensions must be considered in relation to China’s fiscal policy. 4. LimitedInvestment Choices: The funds from an individualcontributions account should be invested to buy the Chinese government bonds oras a fixed deposit in banks at a very low interest rate as an alternativeoption.
The interest rates are repressed by the Chinese government due topolicy regulations as a result of which these investments yield a lower return.In comparison, to average career salary the retirement benefits acquired bythis investment is relatively lower. The capital market in China isunderdeveloped despite its modernization and economic growth.
This can analyzedin terms of understanding the investment options in China, which are limiteddue to the volatile environment. As discussed above, the interest rates inChina do not fluctuate with the inflation rates and therefore it yieldsnegative returns. This volatility in the Chinese stock market has restrictedmultinationals or international corporations to invest in Chinese retirementplans (See box).
This concept can also be explained by knowing that the Chinesemarket is regulated more by the rumors than by economic speculations. To create a more sustainableenvironment, China should consider opting for long term investment plans forits potential investors in the market. The reforms could include; The NationalSocial Security Fund should invest pension assets to provide sufficientretirement income without imposing high contribution requirements. After 2017,the Chinese government should consider segregating the pension contributions intwo pools i.e. at the national level (one for each employee and employercontribution) and by appointing a National Social Security Fund (NSSF) as thechief officer to monitor these pools with a main objective of achieving higherreturns on investments in relation to the risk of the investment.
China must also consider developinga second pillar of its retirement savings i.e. the tax subsidized savings forindividuals through employer sponsored plans. This can be established in termsof Enterprise Annuity; the contributions by employer on behalf of employees.These schemes should be encouraged by government by providing tax subsidies forthe employers. This can result in an effective regulation of pension programs. BibliographyUnder the new Rural Pensions, the normal retirementage is 60 for both men and women.
“WorldPopulation Prospects: The 2012 Revisions,”2013, United Nations, Department ofEconomic and Social Affairs, Population Division, Population Estimates andProjection Section, accessed at http://esa.un.org/unpd/wpp/Excel-Data/mortality.htm.The average is unweighted.
See “Statistics onAverage Effective Age and Official Age of Retirement in OECD Countries,” OECD,accessed at http://www.oecd.org/els/emp/ageingandemploymentpolicies-statisticsonaverageeffectiveageofretirement.htm.Chan, Kam Wing, “China, Internal Migration,”Immanuel Ness and Peter Bellwood (eds.), The Encyclopedia of Global HumanMigration, Blackwell Publishing, February 2013, accessed at http://faculty.
washington.edu/kwchan/Chan-migration.pdf.Johnson,Ian, “China’s Great Uprooting: Moving 200 Million into Cities,” New YorkTimes, June 15, 2013, accessed at http://www.nytimes.com/2013/06/16/world/asia/chinas-great-uprooting-moving-250-million-into-cities.html?pagewanted=all=0.”StateCouncil Interim Provisions on Portability of Pension Benefits of The UrbanEnterprise Pension System,” State Council, December 2009, accessed at http://www.
gov.cn/zwgk/2009-12/29/content_1499072.htm. Interviewwith Stuart Leckie, July 2013. Inan effort to raise pension benefits for lower income individuals, thegovernment already subsidizes each participant’s annual contribution, and then,at retirement, provides an additional 660 yuan per year to participants in thenew pension programs for rural workers and non-employed urban residents.
SeeZuo Xuejin, “Designing Fiscally Sustainable and Equitable Pension Systems inChina,” presentation at IMF OAP/FAD Conference, Tokyo, January 9-10, 2013,accessed at http://www.imf.org/external/np/seminars/eng/2013/oapfad/pdf/zuo.pdf. Chan,Kam Wing, “China: Internal Migration,” Immanuel Ness and Peter Bellwood (eds.),The Encyclopedia of Global Human Migration, Blackwell Publishing,February 4, 2013.
See also Zhu Jianhong, “2012 National Migrant Workers SurveyReport: Migrant Workers Total 269 Million,” People’s Daily, May 26,2013, accessed at http://politics.people.com.cn/n/2013/0528/c1001-21635235.html. Seealso Song, Sophie, “China Now Has More Than 260 Million Migrant Workers WhoseAverage Monthly Salary Is 2,290 Yuan ($374.
09),” International BusinessTimes, May 28, 2013, accessed at http://www.ibtimes.com/china-now-has-more-260-million-migrant-workers-whose-average-monthly-salary-2290-yuan-37409-1281559#. The28 percent in total contributions is paid only on wages up to three times thecity average. For example, if the average wage in Shanghai were 2,700 yuan($440) per year, the 28 percent would be paid only on the first 8,100 yuan($1,320) of an employee’s wages.