China’s pension fund is under increasing pressure, and people may find that they will not receive enough money after retirement.
The country’s current pension system consists of a public account and individual accounts, both funded by social security taxes. The system was started in 1997.
Employers pay an amount equal to 20 percent of each worker’s wages each month to fund the public account. Workers pay 8 percent of their wages, which goes into their individual accounts.
People must contribute to the pension accounts for at least 15 years to collect a pension after retiring. The size of the pension depends on the earnings that produced the sum in both accounts.
The country’s pension system ensures that the money in the public account is directly used to pay pensions to those who have already retired.
“Before the pension system was introduced, many people had not been asked to put a proportion of their salary into a public fund for pensions, so after they retire, their pension will be covered by those who pay the money afterward,” said Lu Quan, a social security expert with Renmin University of China.
Every province, municipality and autonomous region has its own pension system, so the profits and losses of the pension funds vary in different places.
“Some coastal provinces, such as Guangdong, Fujian and Zhejiang, which attract millions of young migrants from inland areas, have a surplus in pension funds,” Lu said. “But in labor-exporting provinces, such as Sichuan and Hubei, there are shortfalls in funds.”
Sichuan’s situation is stressed. The province has about 2 million retirees and 4.6 million workers who pay into social security. That means 2.2 taxpayers support one retired person, the New Finance Economics magazine reported.
The national ratio is 3.5 taxpayers for each retiree, according to Fan Ming, director of the Institute of Market Economy at Henan University of Economics and Law.
To offset shortfalls, some local governments are using money from individual accounts, gradually depleting them.
China’s pension fund is 1.3 trillion yuan ($200 billion) short of the total needed, said Zheng Bingwen, a professor at the Chinese Academy of Social Sciences.
The amount is likely to increase as the population ages. Three out of 10 Chinese will be 60 or older by 2040, according to a United Nations forecast.
To deal with both the pension system’s problems and an aging society, Lu Xuejing, a labor expert at Capital University of Economics and Business, suggested the country desperately needs to raise the retirement age.
Another solution, she said, would be to expand the number of people who contribute social security taxes.
At the end of March, nearly 260 million people working for companies were part of the pension system. Employees of private companies and many migrant workers are not yet paying into the social security system. The central government plans to make the system cover more workers in the next five years.
Diversified investment channels should also be adopted to ensure the appreciation of pension funds, Lu Xuejing said. Systems with surpluses in pension funds generally save the money in banks or invest it in national debt, neither of which produces more than a small return, she said.
Some experts also consider it improper that some local governments take money from individual pension accounts to offset shortfalls in the pension system. The authorities manage those accounts.
Lu Quan said workers’ individual accounts are private assets, and appropriating money from them may have infringed on people’s rights.
“Money in individual accounts should not be used. Instead we should reserve the money and make it grow,” he said. “Profitable investments should also be made to ensure the money can appreciate reasonably.”
Lu Quan said the shortfall should be filled by provincial budgets and profits from State-owned enterprises.
Shanghai’s top official, Yu Zhengsheng, told a meeting in February that the city would allocate more than $1.5 billion yuan in its budget every year to fill the gap.
Lu said a unified national pension system also would help to balance income and expenditures. China plans to unify the provincial-level pension systems into a national system in the next five years, under the country’s 12th Five-Year Plan (2011-2015).
The government also has set up a $130 billion social security fund to complement the pension system when the population’s aging peak comes.
Another change is possible. On Thursday, the Ministry of Human Resources and Social Security proposed a rule that would allow the balance in an individual’s pension account to be inherited by his or her offspring.
China Daily Asia Weekly on May 20, 2011, page 06